www.Bust.com

0 Comments | Insight on the News, March 26, 2001 | by John Elvin

The Internet bubble consisted mainly of IPOs for Web-based retailers and for sites that expected support to come from advertising. These were stocks issued to raise startup capital for companies that really amounted to little more than dancing electrons on a screen. The big loot goes to the investment bank that markets the IPO.

The bankers set a price for the stock and pay the entrepreneur that price, while they realize any initial gains if it jumps in price on the day issued. The entrepreneur, or anyone in the company holding stock, is forbidden to sell for six months and greatly restricted thereafter. So, if a stock is issued at $10 a share and then jumps to $100 a share at first, the banker and those let in early on the deal reap the gains. Thus the "market worth" of a company may grossly overrate the capital it actually has raised, with much of that money going to bankers and their friends.

Richard Schmidt, editor of the Stellar Stock Report and an investment adviser and money manager with an impressive track record in troubled times, says bluntly: "Good companies do well, bad companies don't. Some were mercenary and just went with the IPOs to make money. Some were `New Economy' types, left-wing touchy-feelies who thought they could operate a business as a group-therapy session. They sat around with a billion in the bank, then $500 million in the bank, then $50 million in the bank, then $1.38 in the bank. If they had been operating a bookstore, a factory, a clothing store or an accounting office, they would have been out of business just as fast."

Schmidt tells Insight, "It's not a dot-com bubble; it's a player bubble or a goofus bubble or a lazy bubble or a stupid bubble." He continues: "About a year ago there were maybe 280 major dot-com retailers. There now are 27. Of those 27, I'd say 75 percent are still going through what they call a `cash burn' which translates to `people who don't know how to run a business.'"

And how do you run a business? "You make money to spend it; you don't spend it to make it," Schmidt says. "It takes hard work to build a business, and these people aren't interested in that. They're interested in making a statement." Schmidt thinks the so-called New Economy is wishful thinking on the part of "guys in ponytails and leather jackets."

He may be on target. As always, marketers must sell and move products. As companies such as Amazon.com have found, this is easier dreamed than done, at least for profit. Other components of the New Economy are the portals (sites that attract Internet users by offering e-mail, home pages and other services) and the sites devoted to news and comment. These must acquire advertising or die. Though the dreamers would balk at the analogy, the Internet is a lot like a plain old-fashioned newspaper. If there are no ads and no paid subscribers -- poof! -- no newspaper.

Among survivors in the news and commentary field, even many of those backed by major players such as the New York Times and CNN have cut back substantially, trimming 20 to 30 percent of their workforces, abandoning partnerships with newcomers that never caught on or shutting down special units created to serve Internet customers who showed up in something less than the expected droves. Despite logging millions of visitors each month, even the most popular Websites are not showing profits.