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Note: The Figures and/or Tables mentioned in this sample chapter do not appear on the Web.
How the Internet Is an Investment Opportunity
Levi Strauss didn't make money panning for gold. He built his fortune peddling denim jeans to hordes of gold miners during California's Gold Rush.
The lesson for anyone trying to figure out how to invest in the Internet is that the key is the online population explosion. You don't need to be a software whiz or computer nerd to make money off Net mania.
It is the throngs of people flocking to use the Internet who create opportunities. Collectively, they make up a huge pool of shoppers, eagerly buying and selling all sorts of goods and services. They provide advertisers with a sizable audience. In their stampede to get online, they are buying new computers, software, and doodads like modems. To carry their calls, phone companies and cable TV firms are stringing millions of miles of fiber-optic cables. High-tech foundries race to fabricate enough computer chips for the innards of everything from cell phones to servers.BUILD IT, AND THEY WILL COME
You can invest in this cyberspace migration in whatever way best suits your temperament, checking account, time frame, and goals.
You can buy stock in companies that exploit this electronic revolution one at a time, like a sharpshooter picking off ducks in a carnival shooting gallery. Or you can invest in several at once—even in entire categories of businesses—like a fisherman casting a wide net.
Whichever approach you take, you'll be helped by the fact that the online population attracting all of these companies is growing as fast as the crowd filling a ballpark before the deciding game of the World Series.
Just look at the trends:
That explains the prominence in online sales of goods and services aimed at women at least as much as men: clothing, flowers, housewares, home appliances, specialty gifts, health and beauty aids, groceries.
So people are swarming online. But exactly who are they? The largest single age group is young Baby Boomers—people 35 to 44 years old. As the pie chart in Figure 1.3 shows, they account for nearly 25 percent of Internet users, according to Media Metrix, a New York company that tracks demographics in cyberspace.
The second-largest online age group is young adults aged 25 to 34. These Gen-Xers, who were born after Baby Boomers, make up about 21 percent of Net users.
Older Baby Boomers and seniors—people 45 to 64 years old—are the third-largest slice of the population pie, at 20 percent. Next in line are members of Generation Y, 18-to-24-year-olds, who account for more than 17 percent of the cyberpopulace. These are college and grad students, young military service members, and workers likely entering the labor force for the first time.
The balance of the Internet's population amounts to almost 17 percent, and is made up of people younger than 18 and older than 64.
The differences among various age segments of the Net's population are subtle, but they have dramatic consequences at the cash register:
1. Nearly two-thirds of Internet users are free-spending young adults or increasingly affluent Baby Boomers.
2. Boomers and seniors along with 18-to-24-year-olds are the most frequent newcomers to the cyberneighborhood.
What does that mean to you as an investor?
For one thing, it means good news. Those monied Boomers and seniors, says Media Metrix, "surf the Net more frequently, stay there longer, and check out more Internet pages than even their college-age counterparts." That, Media Metrix adds, debunks the myth that older Americans are technolaggards. This translates into revenues for lifestyle-and health-oriented web sites, says Doug McFarland, senior vice president of Media Metrix.
"Internet marketers with an eye on the future are discovering how focusing on this overlooked, high-spending audience can be a wise business strategy," McFarland reports on his firm's web site. It gets better, Media Metrix says. These Boomers and seniors have disposable income, and they spend it. They're the age group most likely to own fax machines and copiers, large-screen TVs, and satellite dishes. Nor is their spending limited to high-tech gadgets. They have the most credit cards and highest usage, they have the highest percentage of frequent-flier members, and they are more likely to buy a new car than a used one.
They also turn the stereotype of young adults as techno-addicts on its head. Compared with 18-to-24-year-olds, Boomers and seniors spend an average of 6.3 more days per month online, says McFarland's firm. They also stay logged on 235.7 minutes longer, and they view 178.7 more unique pages each month. As Baby Boomers might say, those are far out economic numbers, dudes.
And as Boomers and seniors grow more used to finding their way around the Web, they're likely to spend more time—and money— there, McFarland says. That's money in the bank if you are an advertiser looking for eyeballs, or if you are a retailer looking for customers, or if you are a business exec looking for colleagues in your industry, or if you are an investor in those kinds of online businesses.
ALL GOOD THINGS MUST PEAK
The Web's trend sounds perfect, doesn't it? Exploding numbers of extravagant big-spenders, fueling an economic boom without an end in sight.
The trouble is that the Internet's boom will have ups and downs. The enormous stock-market gains by Net businesses in the late 1990s, for example, were put into painful perspective by the abrupt setback that started in the spring of 2000.
The Net's popularity will also go through longer-term cycles, just like other aspects of human life. Take sports. In the 1920s and 1930s, baseball and boxing reigned supreme. Today, boxing still has lots of fans, but it is far from the audience magnet it used to be. Heck, even baseball has slipped behind such sports as auto racing in drawing spectators.
In the case of the Internet, its phenomenal growth will be impacted by fluctuations in the online population.
Online retail trade will be affected by the buying habits of each age group.
Its current explosive expansion will level off in 2004 as the Net runs out of newcomers, Forrester Research forecasts. But surging growth will return to the Net as today's teens and twentysomethings who make up Generation Y approach their peak earning years in 2010.
On the business-to-business (B2B) side of the Internet, the Net will flourish as businesses expand their online activities. As expansion levels off, so will new investment opportunities. This cycle will occur in one geographic region after another, Forrester predicts. The more economically advanced a region is, the sooner it will peak and then level off.
North America will go through it first, leveling off by 2003. Western Europe will follow, leveling off in 2004. Asia, Africa, and the Middle East will start what Forrester calls the hypergrowth cycle in 2002, leveling off by 2010. But the stronger economies of Asia will ramp up faster along the way. In between, Latin America and Eastern Europe will see their businesses start the cycle in 2004 and 2005, respectively.
In other words, growth will be carried like the baton in a relay race. One region after another will sprint forward. As an investor, it won't matter much which region is hot at any given time. All you need to do is invest in companies doing business where the action is.SHOW ME THE MONEY
The most common activity on the Net is studying nineteenth-century Russian literature.
Okay, just kidding.
The thing people are most likely to go online for is e-mail. From an investment perspective, that's almost worse news than studying old Russian writers would be. At least fans of Leo Tolstoi and his literary comrades would probably buy a lot of very expensive caviar, Siberian sable, and spicey vodka.
The trouble with e-mail is that hardly anyone needs to pay for it. E-mail service, in fact, is often available for free. So don't bother looking for e-mail service providers in which you can invest.
E-mail, though, is crucial to many companies' plans for making money on the Net. That's because they use e-mail as a come-on, a loss leader, a freebie to lure customers in the front door. Once customers have signed on for free e-mail service, they become part of a potential advertising audience. They're also potential retail shoppers. Truth to tell, they are fish in the barrel. They are a potential customers for all of the pay-for-service features offered by that Internet portal providing free e-mail.
And people do spend money online.
With a cumulative price tag of $7.7 billion, Americans spent more on leisure travel than anything online in 1999. But they did spend freely on other retail merchandise and services, as shown in Table 1.2.
Merchants sold $3.17 billion worth of computers, TVs, and other consumer electronics. People shelled out $1.62 billion for clothes, shoes, and apparel accessories. Shoppers paid $1.24 billion for software and another $1.2 billion for books. Even flowers are nothing to sneeze at. People ordered $354 million worth of petals, pots, stems, and bouquets.
All of those totals are projected to grow dramatically through 2004. New industries will get in on the online action, helping to boost future consumer outlays.
For example, the auto industry did virtually no online retail business in 1999. But it sold cars, trucks, sport utility vehicles, motorcycles, and so on worth $400 million in 2000. Business is expected to grow nearly fivefold in 2001, and reach $16.6 billion by 2004. And that big-ticket figure doesn't include a penny of the $200 million in their own purchases of parts and materials that Detroit's Big Three automakers plan to steer through an online exchange.
The car industry is hardly alone in harnessing the Net for wholesale commerce. Paper, chemicals, large-scale real-estate owners, convenience- store suppliers, home-building suppliers, restaurant fish buyers, even consultants for dot-com firms . . . you name it, and mainstream industries are also jumping on the Internet bandwagon.
They see the Net as a place where they can force suppliers to compete head-to-head for business, leading to lower purchase costs on the ingredients they use. The speed of communication and the ability to centralize information will help them slash inventory delivery times.
It gets even better. Your investment choices are not restricted to just online retailers (often called B2C or business-to-consumer firms) or B2B enterprises. You can invest in companies that rarely or never set foot in cyberspace, but whose own revenues expand because they sell goods and services to businesses that do trade online. Parcel-delivery services like to joke that they don't sell anything online and yet are the biggest beneficiaries of the Internet. But the FedExes of the world do help customers track deliveries by conducting online dragnets.
Finally, one of the largest and healthiest categories of Internet investments is made of companies that build the Net's skeleton. These are firms that make the Internet's infrastructure: the telephones, computers, and software, the microprocessor guts of so many high-tech gizmos, the underground cables, wireless transmission towers, and digital cameras—all of the things that must work behind the scenes so people can receive e-mail, send birthday cards, play online games, order computer monitors, listen to music, catch up on news, deposit a paycheck, and gossip about the hottest Internet stocks.
The investment opportunities are concentrated in the fields of technology and telecommunications. But they also span every sector of industry.
In Chapters 2 and 3 we'll explain how to tell one category of Internet business from another. And starting in Chapter 4 we'll discuss how to make investment decisions.