How long before bubble bursts on over-inflated Internet stock?

Just as scientists are beginning to challenge the over-simplicity of E=MC2, it is time to challenge some of the equally simplistic concepts in the world of new media.

Specifically, convergence as an inevitable conclusion is clearly untenable. A+B+C+D (or in this case telecoms, information technology, media and electronics) = success is not a truism. An example is e-commerce, where the current norm of revenue without profit can clearly not be sustainable in the long term.

Amazon.com, the darling of Nasdaq, has yet to make an annual profit, but it is valued at three times that of any traditional bookseller. Another Internet example, CDnow, currently merging with N2K, made a successful secondary IPO (initial public offering) with losses of more than $9m (5.5m) in its pre-filing quarter.

Further afield @Home and Road Runner, two offshoots of cable companies offering broadband Internet access, are companies to ponder when attempting to figure out how the valuations of new media companies will stack up.

@Home, whose principal shareholder is TCI, has a $5bn (3bn) Nasdaq valuation and was cited as a main attraction for AT&T in its $48bn (29bn) agreed deal to buy TCI. Meanwhile, Microsoft and Compaq paid $212.5m (128.8m) each for ten per cent stakes in Time Warner’s Road Runner. Yet the combined penetration of both companies is only about 200,000 subscribers.

In the arena of interactive TV, Microsoft has paid nearly $500m (303m) for WebTV which, a year later, has reached only 350,000 subscribers in the US. This is hardly mind-blowing in a country of 100 million households. So where is the return on investment? Can it really make sense to throw out financial wisdom just because the deal has an “e” for electronics in it?

How is the price being calculated? What is the track record of the prospective partners and staff? What is the competition? How fast is the technology evolving? Is this a technology looking for a market or a “proper” business opportunity? Too many of questions remain unanswered in too many of the high-value deals buoying up the sector – and related stocks.

With 120 million people expected on the Net by 2002 (Jupiter Communications), and an e-commerce market predicted to grow to $16bn (10bn) (Datamonitor), there are clearly markets to be exploited. But that’s no reason for throwing caution to the wind. Caveat emptor makes sense – even in the electronic world.

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