Week's Clue: Wall Street 1999
Usually I write about Internet Commerce, but this week I think we should all consider the impact of the Internet on commerce, and on the real economy.
So who'll play James Cramer when this sequel to the movie "Wall Street" comes out? He's obviously the Gordon Gecko of this age, but I'll predict right now his importance will be no more lasting than those of his 1980s' counterparts.
The fact is the Web has enabled a takeover of the world's largest asylum, Wall Street, and the inmates are running wild. From "day trading" rooms , and behind the screens at Web trading sites , individual investors are calling the shots, a few hundred shares at a time.
This can be seen most clearly in the market for Internet-related issues. It started last summer, when professionals using conventional valuation techniques sold Yahoo and Amazon short, knowing they weren't worth what the "screen savers" were paying.
But here's what happened. While Yahoo and Amazon have a lot of stock, very little of it trades. So small changes in supply or demand for this "float" can have a big impact on price. Remember that 10,000 people buying 100 shares each represents 1 million shares of demand, and there are now hundreds of thousands of such investors. (The average trade in Yahoo and Amazon in the last few months has been just 300 shares, CNBC reporter David Faber has reported.) Thus the pros had to buy back shares and take huge losses. When the shorts retreated, and an autumn bear market turned into a mere correction, the way was clear for the real fun to begin.
When the threat of "shorting" - selling a stock now hoping to buy it back for less - is removed, many Internet issues become as easy to manipulate as penny stocks were a decade ago. (Cramer notes you can also short a stock by "buying a put," an option to sell at today's price in hopes the price will fall before you have to put out cash.) Since the signals that induce day traders to move come in the form of price changes on screens there's no conspiracy here. The game is legal. Without short sellers, however, there's no one placing bets that can make a target fall in price and provide discipline to the market.
Let's say you were in on the move in Yahoo. What was $10,000 is now $80,000, and it's now easy to borrow $40,000 on the position with which to buy eBay for $50/share. Within a few weeks you've now got $160,000, so you get downwind of its competitor, OnSale, trading two weeks ago around $20. (It went up to $100, then back down to $50 within a week.) You're a player now. Since the businesses are real, "news" (like a loss exceeding analysts' expectations) can be planned for. If you lighten up on your winners slowly, you're making real money. And if you're still at your day-trading screen, you can play this slot machine hundreds of times during any move.
If this game sounds familiar, you get our 'A' in history. The same game was played in the late 1920s by amateur investors. The game ended with the October, 1929 stock market crash. The problem, as with all speculative bubbles, is that if gains aren't driven by real profits, a market correction can become a collapse. The people who run the markets were doing their best to change that psychology, until they decided a market fall threatened the global recovery. But even if Alan Greenspan is in cahoots with you, a bubble is still a bubble. The game ends when there's a true rout that forces players out of the markets. Many thought that rout came last summer, and shares fell 25% in value on average, but the quick rally back to old highs emboldened the plungers. (This game will likely end as it did in 1929, with a recession. President Hoover denied the next year that recession was occurring. "It's just a small depression," he said.)
Over the last week the game has accelerated. It's also gotten more dangerous, moving from multi-billion dollar plays like Yahoo to smaller, more easily-manipulated issues like Books-A-Million. Even Davvix, a Christian community site, found itself used in this way when it announced it would sell gospel music online. (Cramer, to his credit, calls such plays "bad Internet," but it's the overvalued "good Internet" profits that fuel the game.) The constant churn has left those who didn't move quickly enough with big losses. Unlike the situation in a real casino, the wheel doesn't stop so you can cash out in comfort. The more you've got, the harder it is to get out the door with your gains.
The mania holds important lessons for Internet Commerce. First, cheap liquid markets are no protection against manipulation by a herd. Second, the Internet speeds up everything, both good and bad. Third, short sellers aren't all bad. Fourth, lots of stock trading sites will go under when the losers sue over what they did to themselves or just renege on bad trades. Fifth, we're all going to be hurt when the bubble bursts, and being on the Internet won't prevent that. Sixth, fulfilling orders, on both the buy and sell side, is the key to staying in an Internet business for the long haul. Finally, don't be confused by small hiccups in stock prices - when the bubble bursts, the explosion will be heard everywhere. (How bad will the crash be, whenever it comes? See the history of Japan, from 1987 to the present, for answers.)
There's a Pulitzer Prize for the reporter whose paper funds even two weeks in one of these trading rooms, profiling the traders, the systems, and the atmosphere. If you're a publisher, consider this a book proposal...
We never get tired of praise here. Seven Wonders named us its tech support site of the week last week, and you'll see their icon on our main page soon. Thanks.
There's still time to buy "Web Commerce: Building a Digital Business," , by Kate Maddox with yours truly, for Christmas, at the attractive price of $20.95 (regularly $29.95) from Amazon.Com. It's part of the Wiley/Upside series. If you're a book publisher, I have two other proposals available for consideration...
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And now back to our show...
Making Next Christmas Brighter
After finishing our Christmas shopping online, a Clue occurred to me that all e-commerce software companies should get to work on starting in January.
We need to get a standard format for all those cash register forms found on every e-commerce Web site. They all ask for the same information, but in different locations on the form. I know there's been a ton of work wasted already. Excite has followed Microsoft and Cybercash along the road to building a "wallet" that would allow quick uploads of your credit card number and other data needed to do a deal. Excite's idea is to put all this on its server, while Microsoft and Cybercash wanted users to click on a desktop icon.
The fact is buyers don't need anything that fancy. What if e-commerce software vendors simply got together on what information was needed, how big each field would be, and in what order it should be presented? (Non-standard data could be added to the form by each site.) All users would need then would be a comma-delimited text file, something they could create in a word processor, which they could cut-and-paste as needed. No new software, no new business models, just something that will keep Santa's fingers from being worked to the bone.
Also, when I talked about that gift registry idea, I was probably aiming it at someone like NetPerceptions . If they built an affiliate program for smaller sites, linked to the inventory on each site, they could easily provide much better gift recommendations than those found on the major search engines. The more data that's collected, and the more broadly the selections are drawn, the more valuable the resource can be - just as with Amazon. If the company holding all this data can remain independent, it will let millions of sites compete effectively with the big boys, and bring the company delivering that value millions of checks from happy site managers. (Now that Microsoft owns Link Exchange, its decision to close Firefly's recommendation engine business looks Clueless, doesn't it?) Just a thought...
We're reaching the end of the game involving the manipulation of search engines. The stakes are too high for corporate America to watch their sites get dissed in favor of those of hobbyists anymore. New searching technology won't fix the problem by itself, so look for all the engines to hire editors (like those at Yahoo), who will force high-traffic and big business sites to the top of searches, not for money but for editorial consistency.
Knowing this, many companies that started by "putting you to the top of search engines" are repositioning themselves as online marketing agencies. Most are false fronts, unless they have real marketing expertise on staff that can also use research, public relations, e-mail, and plain old marketing horse sense to create a full campaign for clients. Even the vast majority of major ad shops lack that.
So what should you do about search engines? First, spend some time on your own site, and on the Yahoo index, deciding what topics and queries you want to be found under. Next, spend some time on the engines seeing where your competitors turn-up on Web searches, especially your successful, direct competitors. Then you can spend some time with Web promotion software, optimizing key pages. Just don't obsess over it. Search engines are only one way you can be found, and they're largely out of your control. Spend most of your energy, and budget, dealing with those things you can control. You'll sleep better at night, and have a better bottom line besides.
I'm always looking at new resources for covering the online world, and frankly 90% of what I see is worthless. Most just don't get the editorial balance right. You first provide value to get attention, and then you keep providing that value while you add links that pay.
Here's someone who gets it right. Michael Shuler of Internet Wire does just what PR Newswire, BusinessWire, and URLWire do - they provide access to news releases. What Shuler does differently is compress the offerings, providing tracked links to the full releases, creating an e-mail reporters can save, scan, and use only when they find it necessary. Not all the releases involve new product launches. Some are interesting new services with real news potential . For dessert, there's a daily collection of links to new sites, called "daily debuts," all short and sweet. Mike has combined some fantastic Clues here, and won't waste much of your time even if you don't get the value I do from the results.
Last week, I dared you readers to just try and find an e-mail address on the new site of the Medical Center of Delaware, which we honored with our "Clueless" designation. (Anyone want to design a "Clueless" .gif we can e-mail these turkeys?) Anyway, Nick Shulgach took us up on our dare, and after some time, found an e-mail address, on a page describing the hospital's need for volunteers. "So 'dere'. :>" he writes. If you want or need to do business with the hospital, of course, you're still out of luck, but Nick's got a point. Just don't expect the hospital to listen when you volunteer to put contact information on their Web site.
Clued-in is iVillage , which sold a small stake (not a controlling stake) to NBC in exchange for on-air promotion. The lesson deserves repeating - it's better to have a smaller piece of something than a big piece of nothing.
Clueless is Canada . Attempts to broaden definitions of "hate speech," then ban such speech online, are doomed to failure based on simple mathematics. You can halt the sharing of child pornography online only because targets are few, so law enforcement resources can be concentrated. When you try to ban something with broader appeal (and everyone hates someone, if only haters) enforcement can only be arbitrary, leading to a lack of respect for law in general. The best weapon against hate speech is satire.