The Internet Is Alive And Well (As An Investment)
James Altucher penned a column in today's WSJ titled The Internet Is Dead (As An Investment). James is a fund manager and well read columnist on investing and he is entitled to his opinion. He puts his money where his mouth is. But so do I and since we continue to invest heavily in the Internet, I thought I'd take the opposite side of this debate.
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.
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.
These are the "stable predictable businesses" that might be destroyed by the changing dynamic. I am not saying they will be. But they could be. The fact that Time Warner is selling AOL and holding on to magazines doesn't convince me that it is going to be a long term survivor. AOL itself is a business that has been negatively impacted by the Internet. AOL was never a pure Internet business. It was a dial-up access business connected to a proprietary online service.
And James goes on to say:
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.
I'll leave Twitter out of this because it is too close for comfort. But Google can easily monetize its huge and growing apps business (which is a huge threat to Microsoft) and also its local franchise. Who doesn't use Google Maps these days? And Facebook is going to produce $550mm in revenues this year, is EBITDA profitable, and has a self serve ad system that is growing like weeds and giving local advertisers the best local targeting around right now.
And what about Amazon, eBay, and Craigslist? And international businesses like Baidu, Lastminute, Vente-Privee, Tencent, and Sohu? There are easily a dozen and probably two dozen worldwide Internet businesses that investors should own today and for the long haul.
I expect that number will grow over the next couple decades to include hundreds of large global Internet businesses that investors can own and make money with. Yes, barriers to entry on the Internet are low and there are no regulated monopolies that James likes to own. But network effects, data leverage, and scale are huge economic advantages online and if you look for businesses that have them, you can and will make a lot of money as the Internet revolution changes business, society, and the world around us. I think you have no other choice other than keeping your money under your mattress.
Great post, Fred. Of course, James is addressing an audience largely comprised of smallish (in the grand scheme of things) retail investors, and so focuses his critiques on businesses that are either publicly listed or are presumed to be coming public sometime in the not-too-distant future. But I don’t think he quite realizes the disservice he does his readers by not considering the amazing amount of activity and innovation taking place just beyond their investable reach. Thanks for helping keep things in their proper perspective.
I think you nailed it Tetsuo.JA’s article considers the universe of publicly traded web companies. It’s hard to stay innovative with a headcount of 10,000 and a 9-figure budget.But Fred has the luxury of being able to invest in small groups of hackers with big ideas – and there’s way more opportunity for disruption there.
nail on head. lack of good quality public internet stocks.
Excellent response, Fred,
Nice post, Fred. More than anything, I think James, or his editor, had a snazzy title that would elicit some comments. I think James understands the dynamics of the Internet pretty well. I guess more than anything, Altucher means that the easy money has been made on the Internet.
well i made $130/share buying goog at $270 in november and selling it at $400 a month or two ago. that was easy. but i don’t think the “easy money” has yet been made. the easy money will be made when the sector is well understood and all of these stocks become blue chips
Perhaps the “easy money” will be made when the sector is well understood but I doubt it. Fred, you’ve been in the Internet since the beginning and have had amazing success. But the average investor who said, “wow, the Internet is the new gutenberg press. I’m going to invest in a basket of search engines” and invested in ASKJ XCIT LCOS CMGI YHOO MAMA would’ve not done so well. And even now, what is there to invest in? GOOG is a special case and maybe eventually it goes to 1000. But there’s better risk-reward out there right now. And what other internets should we even consider?Meanwhile, with one trillion in stimulus dollars about to rain down on infrastructure companies, there’s plenty of sectors and stocks with better risk-reward. I love the internet (I’m an investor in and on the board of bit.ly, for instance) but its hard to find the initial dream of amazing margins and growth in any of the stocks out there at the moment.
Hi JimI listed a bunch of stocks in my post. A few are private but most are public. Investing in internet stocks in the late 90s was hard. Its easier now. There are some great companies out there with very strong franchises. I would buy most, if not all, of the names I listed
James,What are your favorite infrastructure stocks now?Also, when’s the next time you’ll be having “office hours” at your friend’s burger place in Manhattan?
Easy money Fred?Out of fairness to your readers, you purchased Google stock on February 28, 2008 (it closed at $475.39). Well after it had formed a clear top. And you purchased more on September 29, 2008 at $400.02. You continued to purchase more until the stock hit bottom.http://twitter.com/fredwils…http://twitter.com/fredwils…http://twitter.com/fredwils…http://twitter.com/fredwils…http://twitter.com/fredwils…You may have well made some money, but promoting a $130 gain on the lowest trade is misleading. All of your purchases were made when the technicals were against you. More importantly, while you were sitting under wate, there were opportunities to make money on the short side and with more strategic longs.Easy money doesn’t sit under water.
Check my covestor page for the full trading history. Its better than twitter for thatYou are right. I was just trying to make a point
oh schnap, you got called out via your tweet history and responded by droppin’ your covestor! excellent defense boss, well played.
Yeah. But he’s right to call me out
Next time you see a stock form a ‘clear top’ (or for that matter a clear bottom) please let me know.
That’s an unfair example to bring up. You bought a stock with higher beta than the SP500 and made about 50%. You could’ve made about 30-35% buying the SPY. Don’t mistake making alpha for what is really just market beta. You didn’t generate any return in excess of the risk above the market you took on with your GOOG position.http://www.google.com/finan…
Don’t take that comment for more than it was. It was easy to make money buying stocks in november, when fear was highest.
Brilliant! Sophisticated! Tech is not out of favor, and some other things are.Just what the world needs, another Cramer protégé LOLhttp://www.thedailyshow.com…
We vote with more than our financial resources, many of us vote with our time. I spend hours gobbling up interesting and relevant information by sacrificing a good chunk of my waking hours to search.The barrier to entry is sweat equity, and the challenge to grow beyond that is developing early revenue models and pitching a viable and rational long term business plan.But big investers can’t easily spend the time necessary to read, follow, and engage the barrage of new businesses. How can they possibly make informed investment decisions? Maybe the Internet is inaccessible to investors who don’t live an breathe it daily.
Hi Mark, Excellent insight, I am part of a venture going live in 2 weeks using Yahoo and sveral others as our partners to create shopping components for these portals. we are all still sweating knowing though the size and scale of these search engines are hughe it aint going to happen overnight. We will work it slow and easy , manage it and operate it like any other start up. Regards, Ed AsterNew Zealand
Howdy Ed, if you don’t mind me asking how’d you come across this comment a month later?I still am dedicated to search and it’s potentially disruptive changes when incorporating user semantic data, as well as semantic algorithms running on all rss info.I’m curious what your venture is building. You can contact me on friendfeed (messel, or Twitter at victusfate)
James needs to review the google ad programs… Adwords makes the big bucks.
I can’t really understand people who are that afraid of what’s new. I see the ‘lack’ of viable business models of what James Altucher calls the new guys: Twitter and Facebook as an opportunity rather than an issue. That means there are still things to be done and opportunities to be created. And as far as Facebook is concerned they are close to finding something that works as you noticed.But as someone working in finance, I would advise James Altucher to stay clear of investments in the Internet, you should only invest in things you can understand…
Well, I’ve invested in the Internet and have started successful Internet companies. But…I’d rather bet on companies where we know the dollars are coming in: the infrastructure companies that will benefit from the recent stimulus, as an example. Sure, if you are a brilliant entrepreneur you can take advantage of the opportunities from the lack of twitter business models. And yes, Adwords makes the big bucks. Ok. What else? Google is pretty fairly priced, even for their growth. And I don’t see a deluge of investors trying to invest alongside DST at the $6.5bb Facebook valuation.
I’m not saying that investment in infrastructure is a bad idea, I’m saying that ruling out investment in the Internet is not a good one.There are Internet companies out there which are going to be big in the future and they come with stronger business models due to the scarcity of available money. You ‘just’ have to find them. I’m saying that and I’m thinking http://www.spotify.com/ for example…
Spotify is great. I can’t wait to see how apple reacts to its arrival in the US
Yes, it’s basically a freemium iTunes and not an online radio like its competitors, they are willing to release an iPhone version, that will be a good test of Apple openness
It was a 10bn valuation for Facebook but that’s not the point I’d like to make.Investing to take advantage of the government’s desire to inject money back into the system is dangerous. You don’t control your own destiny if you are sucking from the tit of obama and friendsI prefer playing on long term trends that are undeniable and totally sustainable
Taking advantage of the bailout would be more a trading opportunity than an investment opportunity
I didn’t realize you were such a savvy investor in recent Internet companies, but the article did come across as misleading. A great majority of the readers will misinterpret it as “the Internet companies are dead”.
It seems like you’re equating “social and media services” with “the Internet.” I would agree that investing in an online music service these days would be exceptionally risky, but then again, so would an investment in EMI. Saying “The Internet is Dead” because services like MySpace and Facebook aren’t predictable is like saying that legacy investments are dead because Sony is getting hammered.The media business is in a massive state of flux and if you’re looking for predictable money, then move along, online or off. In the meantime, there are loads of online service- and e-commerce-based companies that are ripe for investment.
I am in your camp Fred. There exists no more scalable business model than the transforming potential of the internet. Access to customers is worldwide and instantaneous. Distribution can be low cost (depending on the model).These factors (and others) will be combined. Opportunity will be dreamed. Success will be had in the right proportion.To outright deny the potential is wrong. Just ask Apple, Google and all the others with dreams that became realities.
It’s an old saw for me but doesn’t it make sense to distinguish Internet media businesses from other types, either transactional or which offer software as a service that its users pay for? Your survey of successful Internet companies could also include Amazon or SalesForce.com, where the value and disruptive power of the Internet are even more indisputable. It’s almost painful to walk into a book-store or think about an Oracle consultant installing its customer database (though not that painful to think of using pre-installed Microsoft Word instead of Google Apps; I don’t think Office is as broken as many do), just because the economics faced by the bookseller or the Oracle consultant are now so punitive.This doesn’t mean that the Internet doesn’t have the same disruptive power in media. I agree with you that it is laughable to think of Facebook as anything but a huge potential profit machine, but what intimidates many investors is the concern that, to generate returns in the current climate, you have to be draconian about controlling the size of the team or you have to be a top-100 media site. You of course have been able to pull off both, sometimes in one company.My main point is just this: I agree with you that the Internet changes everything, so long as our definition of everything isn’t just the New York Times and People Magazine.
Great point Glenn
That’s the thing- I really disagree. Because of the high level of disruption of the internet, I find myself liking bookstores more (when I need them), and appreciating the niceties of Microsoft Word (when I need it) on a much higher level.Those industries will shift radically and become much more higher end and service oriented. The bookstore will become a meeting ground of booklovers. You’ll get more than just word processing and spell-checking in an easy to use layout out of Word. You’ll pay the premium, and you’ll be informed by the Internets.
I like browsing actual bookstores too but would rather run Amazon, and often I would rather buy from Amazon so I don’t have to take the book to the postoffice…
There is one important factor alluded in the post that is never discussed – time horizon. A VC is willing to wait up to 5 years (or more) correct? A fund manger have to show some profit every quarter. It used to be that a regular investor in a mutual fund was told to wait two decades till his/her retirement, etc.Internet might be resting for the next 3 months or it might be growing like crazy but we will only see it retroactively. It is dead as far as a fund manager is concerned.
This begs an interesting question: is venture capital a viable asset class for an investor. Various studies have tried to show what the returns of venture capital are. Its difficult because there is a lot of survivorship bias. However, what we do know is this: venture capital succeeds when the public stock markets do well. The better the public stock market does, the more exits there are for VCs. Admittedly, there’s some M&A when the market is down (we can all find anecdotal evidence for this) but expect your big returns during multi-year market rallies.So, rather than VC as an investment, simply buy SPY with 250% leverage.Pros: – your money is 100% liquid. You can get it back anytime you want. VC investments are totally illiquid until the exit. – less fees. You pay minimal fees in the ETF as opposed to the 2 and 20 a VC firm will charge. – similar returns. When the market begins to rally, the returns you’ll experience will rival that of the best VC firms.Cons: – You are forced to “mark to market” if you are invested in SPY vs a VC firm, so your mental notion of your net worth will be much more volatile. – You lose the potential to dream. It would be great to be invested in Fred’s firm (thanks to his investments in Twitter and Etsy) and no other firm. But not everyone has the chance to be invested in his firm. Most VC firms will not wake up after this downturn with as good a portfolio as Fred’s.
good points, though isn’t it more accurate to think about how VC investments contribute to a portfolio of assets than an either/or analysis? As (at least hypothetically) a high beta/high alpha investment class, a small (<5% allocation) VC exposure provides an investor the opportunity to meaningfully move the needle on one’s portfolio without a significant capital outlay.
James, is it true that Sarbanes Oxley made IPO exist complicated anyway? And even if there is a bull market friendly to the IPOs, the prerequisite would be the common perception of a hot sector that is ‘alive’ and forward looking. If one to accept Fred’s argument that this is in an inevitable, long term game changer, this would be precisely the time, when everyone thinks the internet is dead, to invest?PS Your VC versus Spy comparison is apples to oranges as the base capital requirement is a barrier anyway, regardless if you can get on Fred’s bandwagon.
We’ve talked ad naseum about the VC asset class on this blog Jim. And you are right, it has structural challenges.But VC post 2000 market break has earned something like 6-8pcnt per year. The S&P is down over the same period.Buying the S&P with leverage from 2000 to today would have been disastrousI don’t like leverage and will not short or buy on margin. I buy stocks when they are down and sell them when everyone wants to own them. I like to buy things before they are well understood and sell them when people know about themThat’s the safest way to invest in my opinionAnd old school, traditional VC, is a good way to make money. Its too bad not many VCs practice it anymore
Well then that is our opportunity isn’t it? I like to buy when others are not
In some ways, we’re still building the *fundamentals* of this industry. I’m baffled every day at the myriad ways that it’s still in its infancy. Fast connectivity isn’t even ubiquitous yet! Books are just *starting* to really become a digital medium! I still get paper receipts, and hire an accountant to do my taxes!Saying it’s not a good investment would be like dumping Ford once the Model-T came out- “oh look, problem solved, we figured out automobiles, the exciting part is over.”
Kiril, you make my point. There were a 100 public car companies in the 1920s. A lot of smart investors lost all of their money investing in automobile companies. Who would know there would be only three that would survive (and now only one!).
comparing capital intensive automotive building to the wires and wireless signals that exist in the sky and continue to connect our planet? i hope you tip the wireless internet robot that brings you coffee some day. lol. i like your article too -emotional responses are goog right! there will always be those that see ahead, others that don’t.
Internet business may not be nearly as capital intensive as manufacturing businesses such as auto companies, but, from the perspective of a small-time entrepreneur in the process of building an Internet business or two, this obscures a subtler barrier to entry.You can profitably offer digital products and services online if your users are willing to pay a modest amount for them. But the venture-funded businesses with a lot of capital can often afford to make the same product or service free, in the hopes that when they get enough users, they can profit from advertising. That’s a less viable model for the rest of us.
yes because too many are following the same old school of internet business logic proving to ourselves certain models don’t work. few of us took the time to understand what is really going on.there are so many ways to monetize using freemium it hurts my blessed heart. this next generation internet that is upon us will blow open an internet revolution where anyone with a good brain and computer can figure out how to participate in the internet economy.THE INTERNET IS NOT DEAD. WE ARE IN THE INTERNET AGE.
Do you think we fully understand the interent- it’s maybe been around is a very public form since the mid ’90’s?The Internet is Dead, Long Live the Internet.
Semi-good answer. As much As I think you can understand those things. I don’t think you can say the Internet is equal to the sum of its parts. Nor do I think that this picture is the pciture we are going to be looking at in even two years.I celebrate the new internet and grieve for the death of its older counterparts. The article shows a good point, he doesn’t know, and he wants to invest in infrastructure as a result. Similarly- we don’t know, because it does change, and there will be many spoilers. There will be money- but he has the right to be nervous. I’m not,because as much as I want to learn about all these technologies, I am not totally attached to all of them either, I welcome the change.The Internet is Dead, Long Live the Internet (aka the King is Dead, Long Live the King)
long live the king. amen. but. that is the thing, the knowledge is out there and available to those who seek it. two years from now, add any slowdown due to the politics of the wireless telcos, we will have mobile broadband speeds that equal what we are used to now using a cable connection. maybe they’ll be just rolling out. we know there is G.hn technology that is likely to take dominance in the market to provide in house networking at 1 Gbit/s using existing cable technology. we can expect 50mbps wirelessly and 100mbps broadband over the next few (maybe several) years. we know there is cloud, the power is knowing why there is cloud.now it just becomes a matter of what can be done with those speeds (there is so much wonderful hardware for the future in my brain), especially as smart mobile devices pick up power and become affordable enough for everyone.hope the answer was a we bit better 🙂
😉 Realize the newbie is the newbie- and a newbie who wants to be on the edge of the curve to see past its horizon- so your answer is fine. I search.
Re: comment to @fredwilson http://twurl.nl/8sby75 Are “too many proving . . . certain models don’t work” or still trying to prove that mass media/marketing models work on the internet.
Just because an industry consolidates doesn’t mean all the investors take a bath.To make your point you should specify how many of those hundred companies went bust, and how many were acquired.
There are way more than one auto company. You can buy toyota, or honda, or chinese and korean autos. Even indian auto companies. Autos are still a growth sector in parts of the world
I believe there were 1000’s of car companies in the early 1900’s, all trying different things. Cadillac was the first to get the steering wheel, clutch/brake/gas pedals, hand brake, etc. all in the right place, and that took many years. And there are still a large number of car companies. You’re just mentioning the major brands. That being said, I think interesting parallels can be drawn between the Internet and the car industry.
Perhaps the auto industry was a bad analogy. Fred’s example of the printing press is far more apt. There’s a whole market instantiated directly, and it enabled a thousand other markets to come into being on top of Print. Think Copy-shops, Newspapers, Magazines, Novels, Dictionaries, Textbooks… to name of few of the directly-instantiated industries that someone made billions on.The point was that right now, we’re using Model-T computers on dirt road internet. We’re printing in black-and-white, and hand-binding the books. At least, that’s how it feels from the inside.Also: I call cheap-shot on “only one left” – the *American* auto industry consolidated and was stifled by problems internal to us, the rest of the world has had dozens of other companies rise and fall, as others have pointed out.
Yeah, but all of that took almost a hundred years, and plenty of smart investors MADE a lot of money investing in automobile companies along the way. That’s too simplistic for an intelligent guy like you.
Actually, most of the original automobile companies were out of business by 1935. Some were consolidated (Dodge, for instance) but not all. And then there were three.
Yeah. Paper reciepts is a big oppty. My partner Brad is looking for a way to play that one. Got any ideas?
Something I’d love to spend more time on, but GameChanger will keep me busy for a while. :)The big challenge, as I understand it, is going to be at POS. Once we can start to move transactions off of crippled card-readers and onto connected mobile devices (all maintained by cost-concentrating retailers), solutions will be plenty.Or maybe someone could do something like http://payperk.com/ does, and find a way to incent more retailers (financially) to do something electronic. But my guess is that it’ll take an outsider to crack it in a big way, though, and likely by opening up a new payment channel.
Digital receipts is one thats been bothering me on why its not there yet. I ranted a few times (http://bit.ly/LnQAB ) and put together a small pic (http://bit.ly/8uTKD) on some of my thoughts. When I looked into it to see if someone out there has implemented it, I came accross http://alletronic.com/ I talked to them to see if they have an API (which they did not) for developers to write plugins. What I found out is they take a software approach, they can patch the POS systems and require users to signup upfront on their website. When the user actually makes the purchase they do transmit the receipt data to their systems. They seem to be popping up in universities and stadiums but not yet in big retail chains.
Interesting, they’re taking a consumer-focused approach. I would think the tack would be adding a ton of value to the retailers (get in sideways, somehow help with cost-saving… inventory? analytics?), and then see if you can monetize later on the flip-side.
I believe the reason internet companies are able to make it so big and so fast is because it’s easy. Easy for consumers to join, use and understand. Digital Receipts are definitely coming in my opinion. The reality is that for it to work, it has to be open and allow retailers to easily connect to the platform and consumers not to have to do much to accept a Digital Receipt in the store. The goal is to mimic the internet onto the real world. Digital Receipts are a great concept for this. Kiran, if you are looking for an open platform with APIs that would allow third parties to develope their own plugins, you should check out http://www.digitalreceipts.com. All receipts are accessible through http://www.myreceipts.com. Something important to note is the face that it is free to retailers and consumers. While I am not trying to promote this venture that I am involved in, I think it merits some attention based on ths comments around DR 🙂
“The goal is to mimic the internet onto the real world”cool idea!
Hi Fred,Actually, I worked on a “digital receipt” seed-startup early this year, as Lead Technologist to produce a prototype for the founder. I believe the founder is currently starting fundraising.I can’t give much more info due to confidentiality, but I’d happy arrange an introduction/conversation.
I’ll see if my partner is interested
Your comment to @fredwilson “the internet is alive and well” is absolutely right. See my response to WSJ here: http://twurl.nl/hqwm6n
Everybody should invest in what they understand. There is so much game changing, disruptive innovation going on in the internet space that these P/E ratio analyzing fund managers will never comprehend.I believe internet is still in its infancy and needs some time to mature before investors like James Altucher who think AOL/Time Warner and Newscorp represent today’s internet businesses can get a grasp on what’s really happening. In the meantime he should continue investing in highway repair companies and stop labeling Twitter as failure before it even attempted to apply a revenue model.
Not labeling Twitter as a failure. And congrats if you managed to invest in Twitter in its early stages. But not everyone was able to do that and many many people invested in the hundreds of dot-com wannabes that are no longer even around. Investment is about risk versus reward and the Internet for the past 15 years of investing (not sure how many years counts as “mature”) has been largely a crapshoot. I keep a fairly wide portfolio and occasionally invest in internets that are too cheap (I like to trade around EBAY, for instance) but usually I stay away from them.
You don’t need to be an early stage investor in hot private companies to understand that internet as an investment is not dead. Also 15 years is probably not too long for a brand new industry that came out of nowhere to mature. It is nothing less than an industrial revolution.There are different phases; 1.0, 2.0, 3.0 whatever and every phase applies the learnings of the previous phase to conduct better business. It has a lot to do with understanding human psyche and how they interact with the web. We probably used the first 10 years understanding how that worked. At the moment we are in a much better place in terms of understanding the consumer and how to interact with them and we will be in an even better place 5 years from now.If something is dead today, it is the business of finance with their vaporware investment instruments. You see more and more people getting laid off and starting their own businesses now. People started investing in themselves. Entrepreneurship is on the rise and so is innovation. As a result of this we will see a surge of new generation internet companies bringing new game to the table.Maybe this business as an investment is risky because of all the unknowns and its experimental state. So maybe you should recommend the conservative investor to shy away and invest in traditional, positive cash-flow from day one (like you mentioned elsewhere) types of businesses. But then again like you said it is about risk versus reward. Conservative risk = conservative reward. When I’m saying fund managers can’t comprehend what’s going on I don’t mean this as an insult. In order to come close to comprehending the current innovations in internet space you guys need to sit down and study things like semantic web, cloud computing, non-relational databases, neuromarketing, the true inner workings of social web etc. etc. And not just Gartner research reports but the nitty gritty. Investors who study the nitty gritty, such as the owner of this blog, have positioned themselves for high rewards. AOL doesn’t even have a pawn in the game. AOL is a digital mullet.Internet business as an investment or otherwise is not dead. Far from it. It’s never been more alive.
I don’t think the scars of the internet mania of the late 90s should scare people away. That was then, this is now. There’s a different set of investment opportunities today and they are not as risky, at least the public ones are not
Nice reply Fred. The interwebs, [email protected]
Fred, not only do I agree with you, but I am actively involved in building a new business that is breaking new ground and adding new value to a giant underutilized asset base that could be done today with the explosive growth of social networks. We see enormous possibilities that come out of the strong trust and increasingly vast digitized social graph. We are in the infancy of new businesses like ours emerging, and investment opportunities will be taking new turns in another exciting direction.
Is your service publicly launched yet?
James’ analysis appears to be largely centered on media (ad-driven) and e-commerece business models, industries that have already been significantly penetrated by net native players. With the low barriers to entry Fred mentions above we’ll continue to see valuable companies built in already well-tread internet sectors, but we also have yet to see the disruptive power of the internet in huge portions of the US economy with elements that are at least partially end-to-end digital, and therefore ripe for the internet’s unique breed of creative destruction. Education (increasingly digital content), healthcare (payments and communications) and energy (electricity being effectively digital) come to mind as spaces in which existing stakeholders have slowed the rate of change the Internet could spur, but we’re seeing innovative models on the periphery of each industry, and many others, that will build enormous shareholder value.
Also gotta love the way that Altuscher recommends companies that are going to benefit from the economic stimulus, like road construction companies, as alternatives. The one-time economic stimulus. Has he heard of the concept of recurring revenue?
To say nothing of the “stable predictable businesses” (like our traditional manufacturing business) that have been completely transformed by the Internet. For the first 22 years of our business’ life, 100% of our sales and customer service were handled in person or on the phone which consumed significant resources.3 years ago we made a radical change by moving to a 100% web-based sales and customer service model. It was a risk to make such a radical change in our old-time industry, but it’s paying off big time. The market share we’re gaining now could never have been achieved without the Internet.Internet technologies are most valuable to Main Street businesses like ours when they improve the efficiency and effectiveness of our businesses. Keep developing great technologies like Twitter, Disqus, Tumblr, etc. and find a way to monetize them. There’s a tremendous amount of wealth in our Main Street businesses. You’re creating value for us and we’re willing to pay you for it. So long as those two points are true, the Internet will remain alive and well (as an investment), but you have to figure out a way to bill us.
I’ll send you a bill eventually 😉
Honestly, it’s a bill we look forward to paying. 🙂
Great post Fred, fully agree.To me the great strength of the internet (certainly I’m not the first person to make this point) is disintermediation — it removes inefficient intermediaries between people and the stuff they want. This has already happened or is happening with things like e-commerce and online news and media more generally, but there are plenty of areas with inefficient intermediaries just waiting to get popped out, for whom it’s going to take longer, but who have it coming nonetheless — education (as you’ve written many times), healthcare, literature (a personal interest of mine)…Your point about the internet revolution being just like the industrial revolution is dead right. The consumer internet’s been around for 15 years — a drop of water in the ocean of human history. Its disruption has only begun.
I am truly and totally agree to what has been counter presented in this post. Internet will thrive and grow in the times to come. However newer strategies will roll out and shall decide the future of Internet
The way to start a passionate debate today is make a statement no longer than three words, i.e.:The Future is FreeThe Internet is Dead
Right on. I would write a more complex reply but my attention span is too
You Are Right
Ha.. did anyone get that? Funny.
Not to be picayune, but those statements both have four words each.
Right on Fred! There are lots of great and profitable Internet companies, and more and more are being created every day. Saying the Internet is dead as an investment today because some legacy companies haven’t figured out how to take advantage of it would have been like writing off the automotive industry in the early 1900’s because buggy and livery companies hadn’t figured out at that time how to make mechanized buggies work for them.
You have to admit its sort of funny how people keep bringing up the auto industry here. Lots of things have improved the quality of our lives: automobiles, roto rooter, the internet, airplanes, etc without necessarily being good investments except to a select few.
I think that all of those industries have not only improved the quality of people’s lives, but have also made lots of money for lots of investors. Add the entire computer hardware and software industries as well. Not only have they produced extraordinary returns for investors for decades, but they were written off as “dead” investments for years.
Honda and Toyota have been fantastic investments and I suspect chinese and indian auto companies may be excellent investments going forward
Along these lines but more broadly speaking, an investment manager named Aaron Edelheit made a similar point: just because you see a large macro trend doesn’t necessary mean it will represent an investable opportunity.This reminds me also of something I read when I worked in business development for a financial Internet start-up. My company was one of a handful that sought to leverage the cost savings of the web to profitably provide recordkeeping services to small 401(k) plans. The idea was that there was this vast market out there that wasn’t cost effective for the big players to consider. Then one day someone in an industry newsletter made an interesting analogy: the small 401(k) plan market was like the China market. The writer dug up quotes from American companies in the 19th century, talking about the huge potential China’s enormous market represented for the matchbooks or whatever they were selling.
I think it’s pretty easy to argue that James’ overall argument is wrong – which is not to say that he’s wrong in the short term.Consider the humble bicycle or, more recently, the skateboard. These are very simple objects when compared to the internet. Yet at least in the case of the bicycle it’s much older than the internet and youth of today are dreaming up and executing bicycle tricks that people of a certain age never conceived of, and probably would have written off as impossible had anyone suggested them. (Go check out Danny MacAskill at http://bit.ly/19kgMc if you don’t know the kind of thing I’m referring to.)Now ask yourself: if young people are coming up with mind-blowing new stuff to do on an object as mundane as a bicycle 100 years after its invention, how can we possibly be so arrogant(?), presumptuous(?) as to imagine we’ve even begun to see what uses something as rich and new as the internet is going to be put to over the next decades or century? To even think you have an inkling of the future of the internet is very likely complete self delusion. And to write off all possible revenue as well…. :-)So, with respect, I don’t buy the argument at all. The fact that James and the boring behemoth companies mentioned can’t see how to make money is, I’m sure, more a reflection on them (us?) than a fundamental / inherent characteristic of the internet and its potential for revenue generation.BTW, I wrote more along these lines at http://bit.ly/mnN5N
That danny macaskill bike video is amazing. My partner brad showed it to me a month or two ago. Simply mind blowing
Terry,Are there a lot of opportunities to make money investing in bicycles and skateboards? Are these examples of wildly popular inventions where the bulk of the rewards didn’t flow to the inventors or initial investors?
Hi DaveI don’t know the answers to those questions. (I would *guess* the answer to the second question is yes.)My point was that if the future uses of the internet are far beyond what we can currently imagine, then it seems premature to conclude, after merely ~25 years, that there will be no future investment-worthy opportunities. The bicycle example was given to illustrate that even with something so simple, so much older, and still pretty much in its basic form, formerly unthinkable new things are still being cooked up *and* implemented. That, to my mind, is an unarguable (though feel free to try :-)) case for the same thing being true of the internet.
Terry,I understand your point, but see my comment above about how macro trends don’t always represent investable opportunities. You’re absolutely right that, like bicycles, we’ll probably be using the Internet in the future in ways we can’t imagine today. But James’s point was about whether there are investment opportunities in this. The examples of skateboards and bikes don’t seem to be promising ones, since, as you agree, it appears that the bulk of the benefits of these inventions didn’t accrue to their initial inventors and investors.
Hi again Dave – sorry for the slow reply. We’re agreed that macro trends don’t always represent investable opportunities. But to go a step further, to claim that that internet is necessarily dead as an investment opportunity is a step too far. Your comment is right, it’s just that James goes on to a conclusion that doesn’t follow.It’s also worth bearing in mind the difference between (to use his example) electricity companies and companies that make use of electricity. Sure, no-one is going to invest in a basket of utility companies and probably not in an internet company in that utility sense. The sooner the internet becomes a boring utility/commodity, the better (partly because that – e.g., things like ubiquitous broadband – provides a stable basis for other exciting and money-making internet ventures).But companies that do things with electricity and with the internet are an entirely different category, a much more interesting one, and I think this is the sense in which people are reacting to James’ article. Those companies are going to do unpredictable things – including, perhaps, making buckets of money. Maybe not. We just don’t know. Concluding that they will/can not on the basis of what we see today is wrong.OK, I guess I’ve said the same thing 3 times now 🙂
I suspect it’s all a matter of perspective gained from personal experience; investing in the internet is similar to trading stocks online for yourself – how you do personally greatly colors your feelings towards it.At a birthday dinner this Spring for Tim Sykes (a mutual friend), James and I both announced our intentions to launch Twitter dating sites; James launched 140love and I launched DateTwit.comBelieving the internet is vast and there’s room for many winners, I wish James nothing but the best of luck with his site but honestly I’ve not heard anything about it for some time now, while DateTwit.com crossed 10,000 registered members only a few days ago and just this morning crossed 11,000 members.I believe James was involved with stockpickr and I don’t know what happened with that, again hopefully good things for James, but I can confidently report that Covestor is a mere 3 days away from announcing the most revolutionary innovation for managing/trading stocks online since the internet began. This Wednesday Covestor is launching a total game-changer that I’m certain will have Rikki’s phone turning red from heating up with interest/offers.I have small investments in a few other internet ventures: StockTwits is an absolute juggernaut. I hear TicketFly is doing incredibly well.As far as I’m concerned, investing in the internet is the greatest thing since (please feel free to insert something more clever than sliced bread…) and my only wish is for more hours in the day so I could do more of it.
I’m happy to report that stockpickr did very well after exceeding millions of users a month the company was sold. And my first internet company, Reset, did very well as well. Both Reset and Stockpickr were proftiable from day one (I like to create companies with cashflow). Bitly, ticketfly, stocktwits (companies I’m an investor in) are doing very well. I’m not saying there are zero good Internet investments. But as an asset class (and among public companies) there’s nothing out there.
I’m pretty jazzed about what covestor is launching too Doug. I’m gonna write a post about it on the flight I just boarded.
Despite the author’s very narrow lens, that article is full of flaws, and deserved the rightful response that you gave it. To say that NewsCorp, Time & Microsoft are the “best” Internet business model companies is laughable in so many ways. That said, it would be nice to see some big IPO’s come out of the end of this recession (Twitter, Facebook, others?), as some like to see the public markets validation.
I didn’t say they were the best Internet companies. But I do think that the heads of those companies are among the best business minds out there. Murdoch, Bewkes, and Ballmer built (or run) businesses that are creating billions in profits along a huge variety of business lines.
With all respects to these companies, their CEO’s haven’t been geniuses when it came to the Internet. NewsCorp is trapped with MySpace, TimeWarner had the AOL fiasco and they killed Business2.0, a great magazine that could have continued to thrive covering the real Internet economy, and how many times does Microsoft have to try something before it gets it right? A big heading like that written in a big pub like the WSJ will get the scrutiny that we’re giving it. Today’s social media and real-time commentsphere offer an instant push-back to traditional media when they deserve it.
I agree about Murdoch. Bewkes and Ballmer were handed businesses to run. They did not create them
James is referring mostly to well established Internet companies (not that I agree with him), but completely forgets about Internet startups. The startup costs of an Internet venture are mostly much lower compared to traditional, physical utility companies. The costs are mostly wages, with infrastructure being ridiculously cheap. This makes early stage investments in Internet ventures much more promising as they can go much further than similar money in traditional industries.
Great post, Fred. IMO, I think it is a great time right now to be investing in Internet and digital media/online advertising startups right now. Better to be investing in spaces that are undergoing dramatic changes and where new business models are being tested/created … that’s when startups have a distinct advantage versus larger, slower moving, more established competitors.Warren
Rock-on, Fred. Good post. I read the WSJ article as well and almost penned my own debate. The one issue about the Internet that drives me crazy is that the Internet, with it’s rapid pace of innovation, can implode on itself. Innovation is fantastic and I’m all for it – just need to have all of the stakeholders who touch the internet in one way or another speed up their pace or there is going to be too much innovation with less than needed adoption.
Everything is inter-connected. Altucher just entered the ‘free’ debate via a different door.Free is the elephant in the room. All he’s basically saying is “why should I invest in a sector that’s seems hell-bent on giving away its services?” It’s not a bad question, but I don’t want to re-open the free debate.As Jason Fried (37Signals) recently said, “I think the future of web apps is more about business models than it is about technology or design.” Personally, I think it’s all three, but the message is clear: the web needs to get better at making money.
Or as another commenter said ‘when are you going to send me the bill?”
altucher is spot on. though i wouldn’t go as far as highway repairs.at the top of its game facebook is ‘ebitda positive’. that’s all you got wilson?it’s all downhill from here (ask myspace). the problem is you can’t eat ebitda (unless you’re russian with special needs).what’s really pathetic is ‘the stars’ twitter and facebook have been pumped by their vc’s (andreessen and wilson) with all they got, on all channels, to the network formed during the years, and this way they managed to get off the ground. ‘get long and get loud’. but unable to make a buck so far. ‘we’re focusing on growth for now’. uh, oh.a true investor would face the reality. facebook and twitter are not and will not be game changers, and the interwebs would be good investments when they start paying dividends.methinks it helps to start your vc fund in the 80s and ride on the back of S&P for 25 years. again altucher was spot on the correlation here.now waiting on the simpletons to unleash the love for their leader…
How is facebook ‘at the top of their game’? They are just getting going. They are google in 2001
Maybe, but you may also be overlooking that Mark Zuckerberg’s thinking is closer to Steve Case than to Sergey Brin
I agree. It works for apple though. It may work for facebook. Its not the way I would go though
Just a couple of thoughts…1. Electronic Arts had $2m in VC capital2. Amazon had $8m 3. Google had $20mFacebook has had over $500mTwitter has had $50mThere’s a big difference here. Facebook to be home run has to get to cash flow positive and profitable and never take a dime more. If it can’t do that then it’s going to be something else. Twitter has a few more years to figure things out – they shouldn’t need anymore money.IMO it’s all about measurable, sustainable, profitable revenue from volume. The first three on the list have it – the last two don’t – yet. Time will tell if they can really execute and turn it into a cash cow. (Remember what I said before – think it up, scale it, milk it, think it up). Facebook and Twitter are both scaling it up. They have yet to milk it.Google and others are in the “think it up” phase – only this time it’s really hard. There is so much noise out there even if the “perfect opportunity” presented itself how would you know it?Personally I think it will be in mobile – and it will be a disruption that causes it.
I can’t believe that guy said “Nobody can figure out a business model”. After reading that, it is clear to me he is a moron, and nothing else he says has merit.Outside of advertising, lots of companies are succeeding with freemium business models. I mean, *lots* of businesses. And if somebody pays me enough money, I’ll advise them how to build a business using this model.Internet-based technology is a game changer. And apparently only people with sufficient technical knowledge can leverage its power. James Altucher is out of his element and should not be writing about things he is ignorant about.
Funds are competing with internet startups for investment dollars-I suppose I should sell My Apple Shares and buy Chrysler ? Even thought America’s Love Affair with Automobiles is Over ! The Internethas developed a new type of Investor , I am not sure too many fund managers are Tech Savvy-I love his comment on Google I bet he still uses a Quill Pen-I like when they knock Twitter which monetized or not has spread like wildfire-In Michigan every segment of the old media has a twitter account , this is some indication of futures-we might say he doth protest to much-or say nothing-
Great insightful comment. Mark, Fred and James Altucher should come speak at my internet conference http://www.webguild.org/
FredI think you actually make his point by listing the “tried and true” internet examples. If you have to include Google, EBay, Amazon and Craigslist as shining examples, doesnt it show how few recent winners there have been ? Each of those examples have become monoliths, effectively blocking out competition from all but only the most random of entrants. They are this decade’s Time Warner. Working to protect their turf and furiously searching for the next big thing. Hoping that they can monetize to the extent you suggest w out negatively impacting their incumbent businesses.Given the current stability of the net for apps like facebook and twitter, shouldnt there be far more than 2 dozen worldwide investments ? Should a vibrant platform only create hundreds of vibrant businesses over the course of decades ?In 1999, you ran out of breath before you went through the list of ideas and opportunities you saw on the net that had potential. Then reality set in.THe internet today is no different than the PC Software business of the 1980s and 90s. PCs were profilerating at work and the home, and prices were falling every day. Every developer saw their goldmine. Except that most never reached it.The same with IPhone apps. While the successes are nice, the revenueless far out number them and the ability to differentiate with an app is difficult at best.Then of course there is internet video. How many have tried and died ? Even most to experience some level of success have fallen off the map and have not been able to replenish their business with successful offerings.In 2009, the number of failures roll of your tongue in a much longer list than recent successes.Can money be made off the internet ? of course it can. Just as money will be made by some writing enterprise software, gaming software, cloud apps, iphone apps, or applications that are able to be run reliably on any stable platform. There is always room for the anecdotal great idea and execution that turns into a business.But most people dont have the deal flow that Fred Wilson has and fewer still can surviving batting 20pct and make the return that VCs make. Typical investors usually get one or two cracks at the apple. The internet is probably one of the worst possible places to look for those investments. If only because its still where everyone is still looking.I would rather see Rearden Steel than another social network. Unfortunately more people think they can make money with a derivative of facebook or twitterTHe suggestion that the Internet is where dreams come true should be dead. Its misleading to most except those
Markets are self-correcting, hence the typical boom-bust cycles. At the moment everyone is chasing market share (page views) because the current wisdom is eyeballs=monetization, via advertising, subscription conversion, or the (increasingly remote) chance of being acquired.Only when this fails (as it will for the majority) will the market will be receptive to new business models. From the ashes of the current model, new ones will emerge.People learn from their mistakes. They evolve.
i think there are massive opportunities on the internet, but everyone is looking at the technology side of things, where i don’t think the opportunities are. instead i think the opportunities are with artists, psychologists, marketers. because of existing value chains, though, i think everyone is looking at technology and investing in technology, when in fact much of web-based stuff can be created in a peer-produced fashion, and thus can occur outside of the firm.
Mark,I’d be curious to hear your opinion of this microcap: Alloy Steel (AYSI.OB). The CEO might not be Hank Reardon, but he seems to have created a sort of better mousetrap: a new process for making the wear plates that protect mining and infrastructure equipment. Sales have declined from last year to break even over the last couple of quarters, but I’ll be interested to see if the company has started earning money again next time it reports.
The company I mentioned above is up about 150% today as I write this, on news that it landed a huge long-term contract to supply its proprietary product to BHP Billiton. I blogged about that today, The Power of Positive News.
I think the dearth of newer internet public companies has a lot to do with sarbox and the penalty box that the public investor put internet companies in post bubble. Skype was sold. So was myspace. So was Youtube. Had any of them stayed independent, they could have been built into public companies.I know of a half dozen quality internet companies with significant revenues and cash flows that are preparing to go public this year or early next yearThis decade has been a washout for internet IPOs. But I think we are going to see them come back soon
I don’t think Sarbox will go away, change maybe but not go away. Everyone is calling for more regulation rather then less. So why would IPO’s come back if Sarbox is a cause for no IPOs? Unless it is the penalty box that is the real cause for Internet companies lack of IPOs, but I just can’t convince myself that is the major impact.I see it coming back also but more because companies are realizing that the buyout opportunities are shrinking and there are not many other opportunities for exit strategies (also more founders seem to want to maintain control of ‘their’ companies), so they’ll bite the bullet regarding Sarbox and IPO. I’ve always felt that fewer IPOs was the result of the anti-Sarbox crowd pushing to delay and stop IPOs so that they could force the government to change the law.
And what of Prometheus’s flame? I rather have that than Rearden Steel any day.
James Altucher is right. Imagine if a real-world manufacturer had to physically roam the world to find each good or service needed in the manufacture a physical product. Site owners today are in the same position in trying to assemble web pages. http://thoughtmash.wordpres…. http://www.digitalscirocco.com
well i just wanted to chime in with my usual:1. economic crisis is just getting started. as this worsens, count on many internet companies refusing to adapt (because they don’t know how but more importantly because they are psychologically unwilling to adapt) and thus failing2. economic crisis is just getting started. count on public markets continuing to be a dangerous place for investors. with regards to public markets, short-term trading is where it’s at. save maybe the green sector, although i think even that is for the unjustifiably optimistic. for the buy and hold investors, there’s always gold! like any old school capitalist, i love selling gold. anyone wants some, just let me know.as the big systems of yesteryear continue to collapse, the opportunity is for the underdogs who bring a guerrila warfare style. think of how the colonies beat the redcoats in 1776, how terrorist organizations like the CIA can beat big armies, how independent publishers are disrupting monolithic media, etc. fred and his peeps know this and invest accordingly (tumblr, meetup, twitter, etc), what i wonder about though is that many of these VC-backed companies are building themselves up to be just like the monolithic counterparts they are trying to disrupt, which i don’t think will work, because the trajectory for growing in such a fashion is being disrupted (i.e. capital markets are broken). new capital markets, as well as new organizational structures that pay respect to the internet’s ability to revolutionize production paradigms (i.e. crowdsourcing), are needed, and i think far more development in that area is needed if we are to unlock the value and profits that us internet evangelists know is our destiny.
fred + kid mercury = chuckD + flavaflavi’ve been anticipating and hoping for this wave of scepticism for a while…..a pile of questionable/copy-cat investments has led to a lot of very incremental stuff…..innovation requires lots of misses to generate hits but the pendulum swung pretty far over the past 5 years……some burnt fingers will head to the sidelines…….the noise will settle down…….and the next seeds will germinate….as long as the web remains a truly open platform…..the opportunities have only begun
Are you suggesting kid and I start rapping?
i think you already are…..just without the beat 🙂
then we need some to provide that
If you want someone to make a few calls- getting free/gnu type programs to get music is not difficult. 😉
This debate is interesting. It would be easy to dismiss James Altucher if he didn’t “get” the internet, but it’s pretty clear to me that he does (atleast in terms of its entertainment value). At the same time, I agree with Fred Wilson 100%.I think where Fred prevails over James is in his apt description of the internet being a true “game changer.” James still sees these internet as a place to merely waste time. And I see where he’s coming from, as I realize his perspective is strictly from an investment-point-of-view. And quite frankly, those internets that have turned a significant profit are few and far between.Despite the low number of “successful” internet companies, the internet exists as a business platform that emerges VERY VERY rarely. To deny it as a viable investment opportunity seems rather nearsighted. As many commenters have said before me, the internet is still in its infancy. Calling the internet dead (as an investment or not) seems like more of an attention-grabbing headline than anything else.Come back to the pro-internet side, James…it’s not just for iTunes downloads, and you know that.
Internet indeed is a transformative and defining technology, but that doesn’t take away the fundamental thesis in the WSJ article that it is difficult to build predictable value from Internet based businesses. Having seen Internet enabled businesses around the world, I am sorry to report that the way Internet greases and makes transactions easy regardless of geographical boundaries will also mean that lifestyles of engineers and entrepreneurs depending on Internet based businesses is going to drastically decline. There are gazillion engineers pouring into the system from around the world willing to work for next to nothing, enabled by the free flow of effort made possible by the Internet. Not that I don’t like it as a consumer, but it also means those who depend on it for livelihood are in bad luck. A few people like Fred the VC will find a way to make money and they would want many more folks to rush in and put the effort so people like him can benefit, but it is not an attractive to become an engineer depending on Internet enabled work. One has to think many times before asking one’s kids follow Internet dependent profession.
All I can say is our companies have software engineers working for them in many places all over the world and I know what we pay them and it is a very good wage
@Interneter…I have to respectfully disagree. You’re saying that the internet is a transformative and defining technology, facilitating consumers in ways never before possible. I think right there you have clearly established that businesses who fail to incorporate the internet are dead in the water.Nobody can deny how traditional media (tv, news, entertainment) has been turned upside-down due to a few internet-based businesses. When I see this, it’s hard for me to deny such a disruptive platform. I think it’s also important to point out that we are entering a completely new era of business. The days of big corporate offices with hundreds of employees will become more and more rare in the future. Small, agile startups have shown just how much muscle they can impose on competition with the use of little resources. This is directly related to the power of the internet, a platform that enables this sort of activity to exist.I would never discourage anybody in becoming an engineer, especially those in the computer science field. If the future of business clearly resides on the internet, mastering a skill within that discipline seems pretty reasonable to me.
@pruett…..I agree with you, except I would add one caveat to future engineer in the computer science field and that would be to become a “renaissance” engineer by studying beyond their chosen field. Studying beyond engineering and sciences fields would enable them to bring difference thinking/problem solving skills to small agile start up.
Great suggestion. I think art, psychology, anthropology, design, etc would all be really valuable disciplines for a software engineer in today’s world
IMO, both of you are just talking about a subset of Internet, which is Web2.0. If this is the case, I agree with James that Web2.0 has a problem.Google business model was luck- “Attributing much of Google’s success to luck,” says Brin-http://itc.conversationsnet…Here is the problem for 90% of Web 2.0 companies- they are trying to copy some one else luck, which is hard. Few of them may succeed- Facebook, Twitter because of the mass adoption. But not everyone with eyeballs/ad model.Amazon & eBay had a revenue model from Day-1. It’s the same with LinkedIn. I don’t buy into the concept of let’s figure out the revenue model later…Finally, I completely agree with you that “The Internet Is Alive And Well”. It’s just that a subset has revenue problem.
That being said- I still go with the grand master model of great art- you copy until someone finds a model to steal. Most fail, the best succeed.
He is really smart but wrong. It’s not that hard to make money on the internet. Everybody’s just going about it wrong.
Agreed. Easy and Big is a Losing strategy. Winning strategy is Work Hard to be Better and Profitable when Small.
Thanks Fred – Some great ‘Yang’ to a load of old ‘Ying’ – I replied to the same article -A great sensationalist headline maybe, but a totally flawed argument nevertheless. It isn’t the internet as an investment that is dead, more a coming to terms with the fact that millions of eyeballs doesn’t, on current business models, equate to big returns and that those properties have been wearing the emporer’s new clothes for far too long.The smart money will however recognise that consumer loyalty is increasingly moving online and so far the big brand advertisers haven’t really found a new home yet so they can follow suit. Opportunity abounds for investors in platforms which offer that new home as they will be the delivery mechanism for all media in the future. So far on an 80/20 rule, all the big online names have built businesses which don’t and won’t accomodate the rich 20% because of their format. (Look at the quality of advertising as a percentage on any of the above sites.)Some of us feel there is a chunk of money in that 20% slice which has not yet been claimed and it has ours and our investors name on it.Jan Simmonds – Founder/ CEO at famebook
James Altucher is an excellent writer and, as far as I know, a succesful investor. His writing about investing is entertaining but generally not very profitable for the reader. The column in question is similar in many ways to his regular columns in the FT all of which were either funny or provocative but the stock recommendations rarely panned out. “The Internet is Dead (As An Investment)” is provocative and overly general. Revisit in any reasonable period of time and James will have been proven wrong.
I think this is an interesting shout out for Twitter http://marshalsandler.com/2…
Well put.Although, I am looking forward to a time when “monetize” isn’t just a euphemism for “sell advertising”. I believe the general consumer needs to catch up the idea that some experiences on the net are worth paying for, after which the right products and services will survive. If someone said in the 60’s that people would pay $100+/month for cable in the future, you’d think they were insane.
Sorry for jumping in so late. I most probably won’t add anything new/interesting to the debate, but I just wanted to say that actually Mr. Altucher is quite right IMHO. He’s not saying that there are no business opportunities over the Internet. He’s just saying that we won’t see any more bubbles here any time soon, ’cause that’s what certainly defines a huge investment opportunity.The next bubbles will most probably occur into other sectors. But, the fact that the Internet has become boring from an investing point of view doesn’t necessarily means we won’t make any more business here, and BTW a 13x valuation is not that bad after all…He also makes another very good point: there’s almost no monopoly or patent protection in the Internet sector. Fact is that after more than a decade we now have only one “Internet giant” or a blue chip if you will, which is a monopolist in fact… How many other companies can achieve that? FB? Twitter? I don’t think so…
Thanks to Fred, everyone, (and the Internet!), for this great discussion.
“AOL was never a pure Internet business. It was a dial-up access business connected to a proprietary online service.” That’s for sure! I think they still are, they just haven’t (ever) accepted it.
An opinion is worth what you paid for it. Reading an article takes about 5 minutes. So I just paid $X for that opinion.Was it worth it? Not for me, nor was the one that sanctimoniously damned the Internet as an investment.There are far too many visionaries out there for me to digest.
To James Altucher a good business model equals old line standard business models, while I think of the Internet as a disruptive force with very different metrics from successful older business model. It’s only human to use the past to compare the present, but what’s needed to understand the Internet of today and tomorrow is vision. I believe the most important characteristic of the evolving internet and businesses like Google is that they are part of an “ecosystem” that are changing the world. We are at the embryonic stage of something that probably will rewire humanity not just business as we know and invest in, and some people are using outdated metrics to determine whether to invest.
Since 1994 people have been saying, “the internet is a new business model”. Sadly, there’s never such thing as a “new business model”. The only business model is “makes cash” and you can throw in “has good growth prospects” and for something thats an excellent business model you can throw in “and has good margins”. The Internet’s dream was all three in spades and that just never came to pass except for maybe one company (Google) and we’ll see when that ship finally passes.Many things have rewired humanity. Particularly plumbing. But it doesn’t mean I’m going to invest in Chemed (CHE), which has a 90% market share in the US on plumbing services (via roto-rooter, founded in the middle of the great depression in 1935). Actually, come to think of it, CHE might be a better investment than GOOG right here.
Alongside my post above, a lot of people here are saying that I’m just arguing the merits or demerits of the new “freemium” model. This is not new either. Its as old as the first caveman who offered his slavegirl crack for free and kept her begging for more. “freemium” is the latest buzzword I’ll chalk up there with “eyeballs” and “B2B”. Its fancy and drives book sales and (as Chris Anderson admits) expensive lecture gigs.Don’t get me wrong. I love the internet. I invest in it. I’ve started Internet-based companies and advised other companies on their internet strategies. But don’t smoke too much crack or you become an addict.
I’d say “Freemium” is more than a buzzword — it is a new way to monetize relationships with customers. There are tangible proof points of quite a few companies making very good returns on investments.However I’m with James on the investibility of the internet. The very openness and lack of barriers to entry, the ease of viral marketing all decrease the need for capital. When there is a low need for capital the value an investor has to pay to own part of a company is higher, diminishing returns. Hence there may be exceptionally good businesses to be had out there, but the likelihood for an investor without sterling seed-stage connections to outperform the market is minimal at best. If you aren’t investing in an internet company before its cosmic inflationary stage, you’re out of luck. Facebook and Twitter might have a good ROI one day but its the very early stage investors who will get any meaningful return from it. Meanwhile, how’s that investment in Slide at 500m pre coming along?This includes, by the way, the large scale publicly traded internet companies (that instead of buying their own stock) are making acquisitions of later stage companies that either have been a general drag on their finances (YouTube) or outright failures (Skype.) That some of these acquisitions are overpaid by the acquirers for “strategic reasons” shows the peril to long term value of even powerful current franchises.Put another way, how many publicly traded internet companies have outperformed the market (or their previous growth trajectories) after making an acquisition over $250 million? I would be very wary as an Amazon shareholder if minimally profitable companies like Zappos have to be regularly taken over at huge premiums to inoculate against competitive risk.
This is a great comment. If james had written this, I’d agree with him as I agree with you (mostly)I think youtube and skype are great assets but maybe in the wrong hands (ebay) or undermonetized (because google can get away with that)
You’re right Fred. However, depending on which perspective you are taking, the returns and investment perspective is very different. As a VC, you can make money through an exit w/o the business ever making money or being overly profitable or profitable at all for that matter.The public markets are a little more unforgiving, (Google aside), the ability for the average investor to make money on a pure Internet play (especially one that hasn’t made any money or a strong business model) has become a little difficult as of late. The lack of a strong IPO market impact this as well. No Internet IPO’s fewer opportunities for the avg investor to invest. I think Twitter maybe a perfect example of this. I suspect Twitter will exit to an existing business. Great investment for the VC community, no opportunity for the average investor.Yes there is money to be made in the Internet and there are and will continue to be more opportunities. The breadth of opportunities and the potential returns however vary depending on who you are an where you sit. And I think currently they are very different.
I might be cynical, but whenever I see an article in the WSJ that says something’s dead, it often means we are on the brink of a monumental run-up in values. I read through most of these comments, and a lot has been said, but I still think no one has adequately figured in the power of the developing world.
If you want to invest in the developing world my recommendation is twofold: cement and motorcycles before Internet. For a discussion as to why I recommend this book: http://www.amazon.com/Findi…
The biggest no-brainer in online marketing would be Craigslist serving up Google AdSense ads.
Fred,I am very late to the party. But, I had helped Bill Burham get together some data on Internet Companies a couple of years ago.Its available here -http://spreadsheets.google….I took a preliminary glance at the companies and quite a few of them are profitable and growing companies. Perhaps, the internet sector has more companies as a % of total companies that are growing/profitable than most other sectors.I read James article and I was a little confused by his central argument. I am not sure if his argument that 1) Public Internet Companies are generally profitable (The data from Bill’s spreadsheets dont seem to suggest that)OR2) The multiples doesn’t justify the potential growth (which maybe a valid point).If his point is the 2nd, then he should have perhaps gone with a less sensational headline such as “The Public Internet companies don’t justify the multiples”
My take is that the author, James Altucher, really misses the boat on this. Of course, he is trying to sell newspapers, not investment advice.The Internet never was and never will be an investment. You cannot buy stock in the Internet. You never will be able to buy stock in the Internet. Of course, you can buy stocks in companies that operate on, provide services for, provide equipment for, will use the Internet integrally in their business model, etc. And this is where the rub comes. Few companies have been able to make money recently on the Internet because it is basically a communication channel. Perhaps, the most sophisticated communications channel we have ever observed or imagined, let alone ubiquitously implemented, but still a communications channel. It’s a wide pipe that you can shove stuff down back and forth, like encyclopedias, like networks of friends, etc.I would agree that the transmission hardware and software of the Internet appears to be a mature market. So are nearly all things related to Web 1. Like shrink wrapped software (look at Microsoft’s unappreciated stock price for the past five years), and investments in Internet transmission hardware and software would not appear to be big gainers anytime soon due to maturity of market, if not post maturity. On the other hand, business models that rely pragmatically upon Web 2.0 and that can create communities around their product or sell related products into existing communities would appear to be reasonable investments to consider. Unless the product is revolutionary in some way like the Internet was during its embryonic period, such investments are unlikely to grow as rapidly as Amazon, Google, and even Yahoo did during their heyday.
My partners and I at http://www.TheNOWmall.com applied the Internet to our 30 years experience in rapid order fulfillment of groceries, restaurant & fast food & retail items. Along the way, we patented off-premise call center staffing (now Arise.com) and earned a Smithsonian Award for Internet-related technologies. We have proven to increase participating store sales by 15% and profits by 58%, while providing employment for thousands. I’d say the Internet is alive and well as an investment…now we’re rolling out our patented network nationwide with our strategic alliance with major fleet owners in the taxi industry to provide service 2/7/365 usually within 45 minutes (7-10 mins from the store cashier). Our revenue sharing program offers participants an ROI of 79%
Is this a comment or an advertisement?
A bit of both J