Radio Daze
Is dot-com recovery on the way?

By Edward B. Driscoll Jr., a writer based in San Jose, Calif.
August 27, 2001, 8:30 a.m.

he later half of one decade saw a wildly rising stock market, and much of that growth came from investments in a new, largely untested technology. That sector, perhaps inevitably, tanked on the street at the end of its first decade.

The decade was the 1920s. The hot tech sector? Radio. Like the technology that formed the basis for the radio stocks, the Internet will ultimately survive and flourish, but only after some massive shake-ups.

Gary Lutin, investment banker and head of Lutin & Co., put the dot-com sector's radio-like rise and fall into perspective: “The expectations on which pricing was based were pure fantasy. The analyses that you saw coming from people who presented themselves as credible sources of guidance on these subjects, were simply speculation.”

But just like radio in the 1920s, the Internet is rapidly becoming a crucial part of the American economy. So, in addition to the dead dot-com carcasses littering Wall Street, there are outright survivors, and companies that have teamed up with existing businesses to survive.

Michele Pelino, director of the Internet Market Strategies Planning Service of the Yankee Group, a Boston-based technology consulting firm, says “Many companies, such as Walt Disney, are pulling their interactive components back into their overall activities,” because they realize that their Internet divisions work far better as part of an overall plan than as independent entities. Recent talks like those between Amazon.com and AOL-Time Warner no doubt signal a trend of mergers and acquisitions of dot-coms with, and into, more established businesses.

But even the failures can be seen as part of the health of the industry segment. That slumped over Pets.com sock puppet on your kid’s toy box? Those empty Peapod and Web Van grocery bags in your recycling bin? These are the casualties in a war that's being won. “A lot of money was wasted advertising sock puppets,” Lutin says. “But if somebody hadn’t been advertising sock puppets on the Super Bowl, you wouldn’t have nearly as many people on the Internet. And if you didn’t, you wouldn’t have the infrastructure. So that really wasn’t such a bad thing, from a broader economic point of view.”

Two to Watch
So far, the Internet winners are few — and the few should be watched hawkishly. Scott Kessler, Internet industry analyst with Standard & Poor’s, says that “the company that was able to not only be an Internet darling but also remain profitable and frankly improve its fundamentals in this environment, is eBay (EBAY). Here’s a company that came public basically being a profitable company because their business model is ideally suited for the Internet.” In short--no shipping charges, no inventory, just a software platform that allows for sellers and buyers to tap into a pool (at least according to eBay, itself) of 34 million other buyers and sellers. Which is why eBay’s stock was at $59 a share, as of the close of Friday’s trading session.

Similarly high stock prices can’t be reported for Priceline.com (PCLN), which ended Friday at $5.79 a share, but they may be headed towards recovery. After a tumultuous year of William Shatner’s ads, and trying to use its platform to allow consumers to “name your own price” for cheap gas and cheap groceries, the company has come to its senses and focused on its core business: cheap airfares. Additionally, Kessler says, “unlike companies like eBay and Amazon, which prioritized their customers as the most important constituency, you get the impression that Priceline definitely did not do that.”

Fortunately, Priceline also decided to refocus on customer service as a way to turn the company around. While this hasn’t yet made a large change in their stock price, several analysts believe that Priceline has made some very positive steps in the right direction. As corporate travel is down and airlines are relying on individuals to make up the slack, the current economic conditions may also be a benefit. Kessler has issued Priceline a “hold” recommendation.

With a little luck, the Nasdaq has bottomed out and the recovery should begin in the fourth quarter. Kessler is optimistic: “All of a sudden, there’s going to be this almost rubber-band effect where people are now going to be moving pretty quickly to either participate in gains,” or get out of short positions to avoid losses.

Clearly, the Internet isn’t going away. But companies that want to make it in the sector are going to have to remember John Houseman’s old Smith Barney pitch, and start making money the old-fashioned way — by building a brand name, establishing customer loyalty, and delivering profitable products to consumers who want them. And hopefully, with a minimum of sock puppets along the way.