This time e-companies are pushing the right buttons

Whisper it who dares, but dot-com businesses are booming again. Thankfully, the industry is making rather less fuss about its prosperity than it did last time around – at the millennium – and there are fewer dim vulture capitalists talking about a new economic paradigm.

So the temptation is to believe that what we have is a second-generation industry that is built on substance rather than hype. American internet enterprises are pushing the Nasdaq index robustly upwards again.

With an uncanny sense of timing, some internet companies, such as Sina, Sohu and NetEase, actually listed their shares on Nasdaq during 2000, just ahead of the slump. There wasn’t a bookie at that time that would have given you a price on their survival chances until the end of the year – to talk of a return to prosperity was simply fanciful.

But the combined stock market value of these three currently stands at some $2.6bn (&£1.6bn), compared with a low over the past year of less than &£100m. By anyone’s standards, that’s a boom – what we have to wonder is whether this is a market with a natural cycle that follows such booms with an inevitable bust.

So it’s not good enough simply to observe the strident recovery in dot-com valuations. What’s needed is to identify the driving force behind that recovery, in the hope that it isn’t the over-excited managers of “incubator” funds and merchant bankers, who inflated the market last time, creating false markets.

Part of the answer this time around must be China. As in other areas of this massive developing economy, China is set to be the largest internet market in the world and those who are developing it can expect an exciting ride and the undivided attention of the capital markets.

But, as we learned painfully three years ago, size and market potential alone aren’t enough to support sustainable growth. There were plenty who talked of the internet’s potential to change the global economy forever, but it all proved a chimera based on unrealistic expectations and absurd notional valuations.

The key difference with China today is that, unlike their counterparts during the last boom, internet companies are making real profits, albeit small ones. As an American investor observes, internet companies used to be valued on multiples of concept, but now they are being valued on multiples of actual earnings.

Some of these multiples may prove to be over-optimistic in the short term, but at least the degree of optimism is being measured through real profits, rather than some notional idea of future profits.

It’s a truism, but it appears that there was no new economic paradigm after all. To be worth anything, companies have to make real money and that applies to the internet just as much as it applies to anything that the dot-com industry at one time was pleased to call the “old economy”.

So there’s something of a flight to quality in the dot-com sector, by which I mean a renewed interest in those companies that are capable of acting like real money-making operations. And we’re forced to identify what it is that separates the internet wheat from the chaff.

A large part of the answer appears to be the recently popular industry buzzword “connectivity”. In short, the internet is not a product, nor is it even a discretely identifiable service industry, but rather simply a medium through which markets or individuals connect with one another.

This is the concept behind the success of Friends Reunited, the online forum for old school chums. But it’s also the formula behind more sophisticated business models.

Probably Europe’s largest online advertising medium, Espotting Media, has just merged with the Nasdaq-listed FindWhat.com in a deal that values Espotting at some &£97m. Both companies operate online marketplaces that connect consumers who are most likely to purchase specific goods and services with advertisers that provide those goods and services.

Online advertisers determine the per-click fee they will pay for their advertisements, which are distributed to millions of internet users. Then advertisers bid against each other for particular keywords or phrases through an automated system, on which the website of the highest bidder appears first, with other advertisers listed in descending order.

It’s a performance-based model that allows advertisers to pay only for those prospects that click-through to their sites. Companies such as Espotting are not destination sites, but networks, which include search engines such as Yahoo! and Lycos.

It makes its money simply by making connections in a measurably performance-related manner. And it is this kind of connectivity that is driving the second dot-com boom.

The same sort of connectivity will drive the prosperity of those companies that provide software and managed-service solutions for the developing home-services market. Servista, for instance, has developed a billing and customer-care platform that has been adopted by Tesco and can be expected to be deployed in other retail markets.

There is still some silliness in what is a very young and green industry. One correspondent to a trade magazine recently observed that fees plus “incentives” have become the dot-com industry’s new “equity in our business” means of acquiring professional services on the cheap. But generally the signs are that the internet is coming of age.

George Pitcher is a partner at communications management consultancy Luther Pendragon