by Dana Blankenhorn
Volume IV, No. VIII
For the Week of February 21, 2000

This Week's Clue: Here Comes the End of the World

This Week's Clue: Here Comes the End of the World 

SSP (Shameless Self Promotion)

Buy First, Provide Later

Hijacking the b2b Revolution

Imitation Advice

Clued-in, Clueless

Recessions aren't inevitable. They have causes. Pessimists have been looking for the cause of the next one for years, so far without success. 

Inflation was the initial fear. Then deflation had its day. A few years ago Federal Reserve Board Chairman Alan Greenspan coined the term "irrational exuberance." That was about 3,000 Dow points and 1,500 NASDAQ points ago - irrational exuberance was mild amusement compared to what followed. More recently oil prices have brought back inflation fears. 

Why should you care? What does this have to do with Internet commerce? The fact is that, in a fast-rising stock market, the creation of money is put in private hands. The Fed's machinations - a nip of borrowing here, a tuck of interest rate hikes there - look paltry next to what we can do in our own companies. We have become the Fed. 

When Cisco rises from $50/share to $150/share billions of dollars in new money is created. When VA Linux goes public and acquires Andover.Net more money is created. It's real money, it happens all the time, and it's the miracle of the age. Investors can cash in stock for real Samoleons, which are then spent on boats or houses, or plunged into new start-ups. This is called the "wealth effect." We rich get richer, while those who cut our lawn and clip our hair stay employed. 

But this "Confederate Money" boom rests on faith. Most Cisco shares don't trade regularly. If just 10% of the shares wanted to sell now, the impact on their price would be catastrophic. The same would be true at VA Linux or any of 1,000 other tech companies. When this happens at a few firms or within a single industry the process is called "rotation" and the game moves on -- from Amazon to Chemdex, from Microsoft to Red Hat. 

The question is what happens when this becomes a general thing? Consider that, as in the late 1920s, stock gains are far bigger than bond gains. Many people are borrowing money to buy stocks. Others are borrowing on the stocks they've already bought to buy more stocks, which is called a "margin loan." Others are borrowing cash based on the value of their stock holdings. When the stock market reverses - when the lenders accept it as fact - you get a "margin call" and the selling accelerates. 

An accelerated bear market is also called a panic. (Before we had deposit insurance and stock market regulation the panic was real because there was no bottom to it.) When panic sets in someone has to play Mr. Potter ("I'm going all out in this crisis"), and the only one who can play the role convincingly is the government. 

That's precisely what did not happen 70 years ago. When the money put into RCA etc. went to Money Heaven, the government feared throwing good money after bad. It acted like everyone else. Even FDR, for all his alphabet soup, didn't really attack the economy's liquidity crisis in the 1930s. He was, like his Republican opponents, too afraid of debt to take Keynes' medicine. Hitler forced everyone to demand weapons - those jobs ended the Depression. 

What happens after the next panic - and panics are (unlike recessions) inevitable -- will determine whether our children are rich or poor. If you want to protect the gains of the Internet Economy, ask your politicians what they'll do when push comes to shove. That's the Y2K bug you should really be worrying about. 

The end of the world is not at hand, but this market cycle will end. How we deal with it will determine the long-term fate of Internet commerce. 

SSP (Shameless Self-Promotion)

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Remember that it's still journalism that keeps the Clues coming. Give me a shout at 404-373-7634.

Takes on the News

Buy First, Provide Later

Some mergers are a good idea. When two companies lack scale to attack a market and merge, success is made from two potential failures. When a small company needing capital finds its Daddy Warbucks, an opportunity is born.

On the other hand claims of synergy are often just an excuse for throwing money at investment bankers. Combinations between rivals can be a way of pulling up the drawbridge at best or a step on the road to monopoly at worst.

The urge to merge among medical Web sites, which continued last week , is driven by a simple fact. No one has yet figured out how to make this work. Tremendous system integration is needed to get a pharmacy, a hospital system, or an insurance system into e-commerce. Without these players, it's just doctors and patients yammering at each other.

The players in this game are using their necessity as a control mechanism. The Internet couldn't overthrow the existing pharmaceutical culture not because of technology, but because of an intricate dance between big government and big businesses. The same is true, in spades, for insurers and hospital companies. Until these players get their pounds of flesh nothing happens. The question is whether anything will be left for those who've invested in the Web plays after they do.

What's really needed here, of course, is a system integrator with a Clue about the politics who doesn't fear angering people. We don't need a politician, in other words, but we could use a hero. It's just that simple.

Hijacking the b2b Revolution

Digital marketplaces are the Next Big Things in the b2b space. It's no surprise that market players and vendors would want to hijack this trend, but here's an easy prediction. It's not going to work.

In the last few weeks I've seen tons of these deals, where marketplaces look for vendors to get them started, or where software vendors ally with a few market participants in hopes of take-off.

Mimeo (what a horrible name!) is an example of the former mistake. They're working with Hewlett-Packard, and their only likely success will be as a consumer play. Ariba is working with J.D. Edwards to make big vendors dependent on its E-Procurement system, which is why Cargill has bought into Ariba's OneWorld solution.

If a digital marketplace is going to deal with vendors, the way to do it is after-the-fact. The new integration between Chemdex and Commerce One makes sense from that perspective. Chemdex' own platform is irrelevant to the creation of the market - it's basic HTML. Once the value is proven, however, you do want integration between what you have and the systems used by all leading vendors - it's convenient and locks market players into your offering.

Instead of getting buy-in from vendors or selling-out to a single vendor, you go for buy-in from many players, with even terms for all. That's the strategy Yet2.com seems engaged in. Billing itself as the "global online marketplace for intellectual property exchange" Yet2.com is offering four levels of access, from free to "match-making" based on a percentage of an invention's revenues. Among those who've signed on are 3M, Boeing, Dow, DuPont, Ford, Honeywell, Monsanto, Polaroid, Procter & Gamble, and Rockwell. Yet2's market may still be "to come," but they're at least going about it in the right way.

Imitation Advice

The demand for practical, actionable advice on Internet marketing and strategy is huge. Even I'm getting calls from what you're reading here, and I'm just a journalist.

So it should be no surprise that a lot of Clueless people are sticking up shingles, and it can be hard for you to tell the difference between what's a diamond and what's cubic zirconium.

How do you tell the difference? The best advice I can give is to look at what people give away, and how they treat you. Those who give good stuff away and treat you right have game - those who don't lack it.

Frank Catalano, most recently of iCopyright, clued-me in to this recently. He claimed that one consulting company  recently put him on its "free newsletter" list and "didn't remove me, then got irritated when I reported them to their ISP."

Even a free newsletter still demands something of high value - a reader's time - and must justify both its technical bandwidth and mental bandwidth.

Frank also sent a sample of this person's work, and I took the time to read it. It's over-written, it's obvious, and it doesn't tell you what to do - just what everyone else thinks about the subject (Bill Gates' resignation). When you're paying for advice, demand more than the obvious, and if you don't see that up-front, keep your hand on your wallet.

Clued-in, Clueless

Clued-in is the Industry Standard's Susan Ornstein for her piece on Juno. But remember a Clue is not total success. The book's now so thick you often have to wade through an ocean to get anywhere, and this article is over-written (to fill space). The obvious point is that Juno has under-performed in its market (free e-mail) and its old boy culture is why. Eventually, she makes part of that point.

Clueless is Isadore Rosenfeld of "Parade" Magazine, who slipped a recommendation for his own Web site  into an article on the disease without divulging the conflict of interest. As a result Rosenfeld will likely lose the "Parade" gig and the respect of peers (like Marilyn Larkin of The Lancet , who passed on this little gem). When readers find out about this, his site may lose the market as well. That's a mighty high price for a little ethical lapse. But it's a fair one.

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