This Week's Clue: Wall Street 1999 

SSP (Shameless Self-Promotion)

Jupiter's Digital News Conference 

Wisdom on E-Mail Marketing 

Turning Away From the Little People 

Clued-in, Clueless

One of James Cramer's favorite rants for investors these days involves the difference between "good Internet" and "bad Internet." America Online, Amazon.Com and Yahoo are "good Internet," he says, valid and valuable businesses that may or may not be worth their current price but won't leave you badly-burned if you overpay. K-Tel, Tel-Save and Books-A-Million are "bad Internet," he adds. These companies do have a play on the Internet, but their business models are unproven, and their futures seem murky, he says. If you chase every .com, he concludes, you'll wind up .broke. 

He's right, but there are two other dichotomies we need to closely examine for Clues to the future. These are the differences between the Big and the Small Internet, and between a Good and a Bad Loss. 

Let's take the first question first. The Big Internet story is as easy to get, and almost as easy to understand, as Monica Lewinsky. Amazon, Cisco, Dell, and Microsoft all send out lots of newsworthy releases, they have professional spokesmen who'll get you interviews, and there are lots of people who follow them you can talk to. Covering Big Internet is so easy that many reporters delude themselves into thinking that's the entire Internet. Part of this delusion lies in the assumption that there's a limit to the number of winners the Internet can deliver, that market shares are or will ever be stable, and that easy profits are in someone's future. Some of these beliefs stem from the history of other industries, mainly manufacturing. But if you look at the history of PC manufacturing, you'll see the assumptions are wrong. The road is littered with the bodies of companies that dominated that business and then faded. IBM once had a dominant share of the PC market. Tandy, AST Research, Acer, and a host of Japanese players were once on the verge of taking over the world. Even today (believe it or not) Dell could stumble, and there are dozens of companies  making handsome profits  inside a market Dell is supposed to "own." 

The harder, better story to tell involves what I'll call the "Little Internet." These aren't vendor profiles, but stories of small companies that have found their markets, or lowered their costs, often without even having to be leading edge, let alone "bleeding edge." The pages of shared lists like I-Sales  and Online Ads are filled with such stories, if you read them carefully and follow-up with principals, their business associates, and their friends on the same lists. But it takes time and savvy to get those stories, and each story's impact seems small. Yet, taken together, these stories and not the Big Internet stories represent the true revolution. (The Grand Canyon wasn't created by a meteor strike.) 

Let's get back to Cramer again. (The follicle-challenged have to stick together.) Alongside the concept of a Good and Bad Internet, let's place the concept of a Good and Bad Loss. The fact is it's always been best for some Internet companies to take a loss, sometimes a continuing loss. (I don't know if Amazon.Com is worth $200/share, but it's worth plenty.) Whether the loss is worthwhile depends on the size of the company, its growth rate, and the size of the market it's aiming for. If you're aiming at a market vacuum that will be worth $10 billion in three years, you'd better be willing to lose a few million per year now in order to gain share. But this logic also leads companies to trumpet losses where the market vacuum is very small, where the growth rate is fairly modest, or where the company taking the loss is mostly a shell. 

Evaluating a loss, in other words, requires that you perform three hard calculations. First, how big is the company taking the loss, and how fast is it growing? A loss of $100,000 on a $1 million company growing 25% a year is much worse than the same loss on a $100 million company growing at the same rate. Second, how big is the market, really, that the money-losing company is targeting? (Assumptions that Amazon's losses don't matter can't be based on the book market, or even the book and CD markets, because those markets aren't big enough - that's why Bezos sells Beanies.) Finally, how large a share of the market does the money-losing company have? A loss at a large, fast-growing company must be discounted if that company still has a single-digit market share, especially if that's a share in a mature or relatively small market. (See the movie "Tucker," or the Panda PC company, for examples.) 

There are important Clues here for investors, reporters, and readers as well. Based on this analysis, Cramer should be glad he's not public. He can talk all he wants about TheStreet.Com being "cash flow positive" soon or even now. Its market isn't big enough to make his losses valuable. Now, if he'd integrated his online paper with online stock and bond trading...but by now he'd have a tiny market share. So your final Clue is this. Good journalism doesn't always make a good investment. 

SSP (Shameless Self-Promotion) 

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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I make my living writing for such publications as Net Marketing , Boardwatch, Datamation, and Advertising Age . So it's Journalism -- checking the news, calling people, listening carefully, writing on deadline -- which keeps the Clues coming, although I also handle consulting, speaking assignments, and commercial writing (ask about those rates via email). If you're looking for excellent work, give me a call at 404-373-7634. 

And now back to our show... 

Cable networks dominate the Web news business today because they can use their air to drive traffic, Jupiter Communications concluded at its Digital News Forum in Atlanta last week. Direct links to portals are seen as a way to cement this dominance. But hardly anyone's making money. 

C|Net editor in chief Chris Barr told me he's made money for two quarters, "so we're a real business." But, with all due respect, one has to ask the question, what kind of business? C|Net has spun-off its commerce unit  and sold a stake in its Snap! search engine to NBC. C|Net has also sold its part of Eonline!, developed for E! Entertainment, to that cable network (it now has more traffic than C|Net, according to Jupiter), and licensed its page creation technology so Vignette could turn it into the Story Server product. It would seem C|Net's profits come from its being a development company rather than a news site driven by ad revenues. 

Scott Woelfel, editor in chief of CNN Interactive, said he's making money, if you don't count the costs of newsgathering he depends upon for content. Merrill Brown, editor in chief of MSNBC, the most popular news site according to Media Metrix data Jupiter presented, didn't claim a profit, while David Weir, managing editor for Salon, indicated the profit he expects next year will be based as much on low costs as anything else. 

Turning red ink into black, Jupiter analyst Patrick Keane said, will take a commitment to e-commerce. Users don't hold direct commerce links against news sites, his research showed. Yet few in the audience seemed eager to embrace the point. A panel of five print journalists expressed the fear they'll lose classified ad revenue, which the Washington Post's Steve Coll estimated may be 25% of total newspaper revenue, but few hard solutions were offered. The Atlanta Journal-Constitution was praised heavily by that panel for its "local portal" play, in conjunction with LookSmart, and for selling access to its archives, so I asked Journal editor Ron Martin if he was making money online. "No," he said, surprised I should even ask. 

Perhaps the most interesting moment of the forum's first day came when the subject turned to the Associated Press, whose news stories have become a staple on portal sites like Yahoo. The AP is a cooperative of major newspapers, and it may see a revolt among those members. "I just feel frustrated," Coll admitted, because AOL and Yahoo use others' news to make money, but don't contribute any stories of their own. 

On the other hand, the most interesting moment may have come when Forbes publisher Rich Karlgaard noted that an online reporter he'd hired who uncovered a scandal at the New Republic was quickly hired away, at four times the salary. "It's a golden age for journalists," he said. "It will be a battle to see who has the brand - Maureen Dowd or the Times." 

Wisdom on E-Mail Marketing  

Jesse Berst thinks we're about to enter the golden age of e-mail marketing , so some wisdom, from Eric Targan of Email Marketing News  deserves repeating. 

In his latest issue, delivered December 8, he makes the following key points about e-mails that urge direct action. First, have users click through to a purchase order, or at least the detailed offer. Second, always get your respondent's e-mail address. Third, use that to develop a relationship, a sharing of information that will give you market credibility, even if it doesn't lead to an immediate sale. 

"In test after test, our advertisers at Joke-Of-The-Day.com -- including most of the largest direct response agencies and advertisers -- have compared response rates from our email lists (and others) to web banner advertising. While text based email can not deliver the pretty pictures of the web, the conversion rates have been dramatically higher," he concluded. "In short, the web is about surfing. E-mail is about doing." 

Turning Away From the Little People  

One of the turning points in the history of America Online came when it stopped sharing revenue with its small information providers, who felt they had built the business, in favor of deals with Big Media companies who actually bought placement on the service. 

That kind of cash flow reversal may be happening at Amazon.Com, as it tries to become a general merchant with its "Shop the Web" plan. A-Clue.Com subscriber Chris Jaeger of USA Bride  wrote to complain "that Amazon removed the Quarterly To Date numbers from its weekly 'Associates Reports.'" While Amazon reversed its course after thousands complained it hastened Jaeger's decision to drop what he called "this miserable associates program." 

The question before the house is what drives Big Internet sales figures. Is it technology and deals made in boardrooms, or is it millions of decisions made by individuals every day, balancing such things as fairness, credibility and value. The success of AOL in using simple software and expensive marketing, treating users as customers rather than partners, and making that strategy work, will drive many strategies by companies that, like Amazon, believe they have the critical mass today that AOL had then. Time will tell whether they succeed, and the jury is never out on AOL or anyone else. 

Clued-in, Clueless 

Clued-in is ABC News  for its story on the growing bandwidth spot market. Hopefully the story will start a process leading to a full discussion of this new money-making market, especially in light of a report by ZDNet saying the bandwidth crunch will continue into next year. And it's stories like this that should drive traffic, not advertising or prominent TV mentions. 

Clueless is Event Horizon , a literary sci-fi site that's paying good money to top writers with no idea how it will get its money out.