from: http://www.computer.org/computer/articles/March/binarycritic300.htm Click Here: <A HREF="http://www.computer.org/computer/articles/March/binarycritic300.htm">Com puter: Binary Critic</A> ----- Binary Critic AOL, Time Warner, and the Crash of 2000 Ted Lewis By fueling expectations that existing technology cannot meet, the merger of AOL and Time Warner could precipitate the largest stock market correction since 1929. Everyone knows that Internet stocks are overvalued and oversubscribed to by speculators and unscrupulous stockbrokers, but few people are taking their money out of the market. Are they extremely clever or is this a national epidemic of irrational exuberance? Will the Internet Bubble burst, as Michael and Tony Perkins claim (The Internet Bubble: Inside the Overvalued World of High-Tech Stocks�And What You Need to Know to Avoid the Coming Shakeout, Harper, 1999)? If it does, will the explosion bring down the entire economy with it? Will the first decade of the new millennium reprise the Great Depression? Expect the Internet Bubble to burst in 2000 and e-business to take a big dip, but don�t look for another Great Depression. There is simply too much liquidity in the financial world to let that happen. But we may be in for a bumpy ride, so fasten your seat belts. Take AOL, Please! The merger of AOL and Time Warner may be a sign of the times, but it may also be one reason the Internet Bubble is about to burst. The megabillion dollar deal is already in trouble and may have failed by the time this issue sees print. Even if the AOL-TW deal falls through, expect a similar partnership to grab the spotlight in short order�and to play the same role in the Crash of 2000 that AOL-TW would have. This type of merger simply has too much obvious potential to be ignored. The argument in favor of the AOL-TW merger goes like this: Internet content companies must merge with traditional media companies to reach their true valuations. Without a content company like Time Warner, Disney, or News Corp., AOL really isn�t worth its market cap, which more accurately reflects the corporation�s potential than its reality. Once the AOL-TW deal, or a similar partnership, exposes e-business for the fraud it really is, the whole house of cards will come tumbling down. Merging new media companies like AOL with old media companies like Time Warner can hit the bottom line hard, because the partner companies now base their market valuation on that of the old media company, not the new media company. Nor is this the only problem confronting the AOL-TW deal. >From Chat to Flicks In 1994, AOL found itself struggling to acquire and retain customers. Then it did a clever thing: It planted employees in the audience to stir up conversation (Ted Lewis, �Insomniac Asylum,� The Friction-Free Economy, HarperCollins, 1997). The stickiness of an AOL chat line, called a �forum� in AOL terminology, went from an average four minutes in 1994 to an average 53 minutes today. This strategy worked so well that AOL bought IRQ (Internet Relay) and evolved the service into Instant Messaging. IM-ing became such a big hit that Microsoft tried to absorb and extend it by grabbing AOL�s Instant Messaging customers, resulting in the �messaging wars� of 1999. But Microsoft�s MSN proved no match for AOL�s 21 million eyeballs�AOL�s massive Internet market share won the day for the big online service. When it comes to the online world, AOL remains king of the Web. But it wasn�t always that way. It took AOL a while to understand what attracts eyeballs and what makes them stay�something Microsoft still hasn�t figured out. That�s the good news. The bad news is that AOL must now work hard to keep the vast sea of eyeballs it has attracted. Doing so will require a paradigm shift. AOL�s customers essentially created AOL�s early content by providing the same services they consumed: chat and instant messaging. Self-generating content has been a perfect model up until now, but there are limits to how many people will listen to themselves talk. Thus AOL�and Yahoo, Lycos, and Excite�need real content. The next phase in the business-to-consumer (B2C) Internet will define an inflection point: Crossing the gap between community-building chat and professionally produced entertainment will be the main e-business driver of the coming decade. In the next phase, AOL, not its users, must provide the content. To increase stickiness from 53 minutes per day to four to six hours per day, AOL must become online cable TV. America Offline? Traditional media such as TV and film require much more bandwidth than online chat and instant messaging. This is where the AOL-TW merger begins to make sense. Time Warner can provide the cable connection plus old media content, while AOL supplies the online technology. The only problem is that deployment of sufficient bandwidth isn�t going as planned, as shown in Figure 1. Figure 1. DSL and digital-cable deployment will take decades. Source: USA Today Research, 13 Jan. 2000, p. 1B. It will take much longer than expected for providers to deploy digital subscriber line (DSL) and digital cable. By 2010, the combined subscriber base of both technologies will still be less than 40 million�about one third of US consumers. Can AOL hold out that long? Or will it go offline before telecoms and cable companies can deploy sufficient bandwidth to AOL�s 21 million customers? Until AOL-TW can furnish the high-speed-access technology needed to deliver what consumers want, it might better deserve the title America Offline. The Big Dip The AOL-TW plan to get big fast is but one major strategy courting failure in 2000. As Figure 2 reveals, we should all prepare for the Big Dip because it portends an even bigger crash. Put simply, too many Web sites are looking for too few customers in today�s overcrowded Internet. Figure 2. The Big Dip: The author�s estimate of when and to what extent e-businesses will consolidate in the next few years. The vertical axis depicts an arbitrary measure of successful e-businesses. Two major trends will cause the Big Dip: � overcrowding of the e-commerce market space, and � consolidation of e-businesses through mergers and acquisitions. The first trend is already obvious today. There are simply too many e-businesses coming online. The branding war is almost over and the first-movers won. Yahoo, AOL, MSN, Amazon.com, and other well-branded business-to-consumer sites will survive, but the late-to-the-party and nonbranded B2C sites will end up in mergers, acquisitions, or death. The 1999 Christmas season was critical to B2C sites. If your e-business blew it like Toys �R� Us did, you have little chance of being around for Christmas 2000. On the other hand, if your site sold more goods than Wall Street analysts expected, you have bought a new lease on life�for at least another 12 months. In either case, it�s all uphill from here. Only well-financed and well-advertised e-businesses will survive the Big Dip. The action has shifted to business-to-business Web sites like Chemdex and VerticalNet. The B2B segment has always been bigger than the B2C segment, but it is only now beginning to attract attention. B2B vendors that provide the B2B infrastructure, like Ariba and Commerce One, are already overvalued by day traders and pension fund managers. Yet stock pickers around the world continue to buy these stocks, setting us up for a Big Dip further down the road. Venture capitalists continue to fund copycat companies, gambling on one or two big successes among the dozens they fund. So what if they lose money on 10 failures when one success can make up for all the rest? Venture capitalists may not be worried, but the stock market isn�t so forgiving. When the Big Dip hits Wall Street, the sell-off will remind us of 1929. What�s the bottom line? The Big Dip and the exploding Internet Bubble will cause a major correction in the stock market that will threaten to end the age of prosperity we currently enjoy. We are clearly headed for a roller-coaster ride. Does that mean you should rush to your browser and sell all your stock? Probably not. The Great Depression might have been avoided through a speedy injection of liquidity�pouring cash into the economy. In today�s highly fluid international money market, cash infusions routinely rescue the world�s economy. Remember the Asian Crisis, the Latin American Bailout, and the Russian Loan Payment Debacle? Any one of these failures could have dragged the rest of the world into a global depression. They didn�t, because the International Monetary Fund and the World Bank stepped in and flooded the troubled regions with cash. I expect the same thing will happen when the Internet Bubble bursts in 2000 and temporarily drags down the whole market. The Crash of 2000 will resemble the stock market correction of autumn 1987. By 2001, the whole incident will have been forgotten, and only the people who panicked and sold out at the bottom will be hurt. Figure 2 shows that the investors who keep their heads and buy during the dip will be rewarded in the coming upswing in e-businesses. The Big Dip and the Internet Bubble await us in 2000. Consider them buying opportunities. The really big one won�t hit until around 2008 when, as I�ve noted before, baby boomer spending will plummet. Ted Lewis is President and CEO of DaimlerChrysler Research & Technology, North America, and author of Microsoft Rising...and Other Tales of Silicon Valley, IEEE CS Press, 1999. Computer Home ------------------------------------------------------------------------ Send general comments and questions about the IEEE Computer Society's Web site to [EMAIL PROTECTED] This site and all contents (unless otherwise noted) are Copyright � 2000, Institute of Electrical and Electronics Engineers, Inc. All rights reserved. ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, All My Relations. Omnia Bona Bonis, Adieu, Adios, Aloha. Amen. Roads End <A HREF="http://www.ctrl.org/">www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance�not soap-boxing�please! 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