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Thinking Out Loud On Internet Companies

Some time in the mid’90s, my family bought our second computer; a $1,400 Packard Bell which contained an Intel Pentium processor, a 2X CD drive and a 2400 baud modem. Our first computer had two 5” floppy drives and a 20 megabyte hard drive. It ran MS DOS. That first computer became obsolete when I tried to use it to run a piano teaching program called “The Miracle” for my then 7 year old daughter. Each “exercise” took a minute to grade on the slow processor. With the new computer, running MS Windows 3.1, I could work at home on word processing documents (Wordstar), or spreadsheets (Lotus), and my daughter could do homework assignments and play mediocre games as well as play with “The Miracle” keyboard. 

Sometime in the mid-90s, there was a new service known as Prodigy which cost about $15.00 a month. Our family tried it, but it didn’t have any particular appeal except for email, but even so, our family’s assigned address was something like 39u85i30w@prodigy.com. Who could remember that?

I think it was 1996 when the AOL service became popular, with its clean design and higher speed. That was a valuable service, where you could look at news, weather, and sports and assign yourself an email address that was logical such as Martin222@aol.com. AOL had a little Icon which looked like a globe, when clicked on, would bring up a non-AOL platform that was known as the “internet.” When we first subscribed to AOL it was about $10.00 a month, but they charged by the minute and this got too expensive. Soon, in 1996, AOL offered unlimited service for about $22/month. After signing up, it became apparent that business was good at AOL (too good). It was practically impossible to sign on due to modem demand exceeding AOL’s supply. AOL offered no money back though. After a few weeks, the access problem was corrected. From its inception through early 2000, AOL stock soared.

Around 1997 and 1998 internet service providers began to advertise unlimited access to the internet for about $15/month. Still my family was using AOL, and it was no problem paying the price premium for the popular AOL service. Who needed the hassle? One day I happened upon www.yahoo.com after having clicked on the little AOL “globe.” There was a clean page with all varieties of interesting topics all hyperlinked in a similar manner to what was on AOL, but not part of AOL. I remember thinking that with www.yahoo.com if my internet service were “faster” we wouldn’t need AOL at all.

After talking to my friends, I found out that the slowness on the internet wasn’t the internet service provider’s fault; it was because of the slowness of the computer processor and modem. This problem could be corrected with a Pentium II processor based (new computer) that was running Windows 95. I traded in the Pentium computer and got $300 from a computer consignment shop (out of business within 1 year), and bought a bottom-of-the-line non-Intel processor based Compaq. After logging onto AOL, and clicking on the globe and getting to Yahoo.com, the speed problem was eliminated. I canceled AOL, and subscribed to Erols.com. Three years later and over 300% in stock market gains occurred before AOL stock topped in late 1999. Today, the AOL service is not a significant part of Time Warner or anything else.

Yahoo still “looks” the same as it did in ’97. A few tricks were instituted to increase page views and therefore advertising revenue. For example, on Yahoo Finance, whereas you used to get a complete company profile that was sufficient to serve as an introduction for more detailed (non-Yahoo-based) research, now the same information, with some additional detail, takes 3 clicks. In 2000, I signed up for Yahoo Bill Pay for which I pay about $7.00 a month. Similar services are available from my credit union free of charge, but for now I’m too lazy to switch. If Yahoo’s price were to go up, I would find the strength and time to switch out. Yahoo collects no additional revenue from me except for “Bill Pay.”

Sometime in ’97 or ’98, my family and I discovered Amazon.com. A great web site, you can research any book no matter how obscure. Amazon gets some of my book buying business. Yet once deciding what book I want, it is easy to do comparison shopping on a site such as www.pricegrabber.com. If Amazon were to raise prices, there would be very little reason to be loyal to Amazon for my new book needs. They have significant and formidable competition. Last semester, my daughter bought about half of her college textbooks from used book sellers using Amazon’s web site platform. Amazon makes an apparent direct profit on sales such as these with little cost of sales. I have used Amazon many times to sell books that are not “keepers.”

At the turn of the century, I “discovered” EBay. We received a gift of a George Foreman Grill and after a couple of uses, my wife decided that it was too difficult to clean and took up too much space in the kitchen. My choices were the trashcan, a yard sale, or EBay. With a liquid nationwide market, I sold the grill on EBay and pocketed about $40.00 after fees and shipping charges. When our Nordic track broke (an inferior product built cheaply to kite the stock of an eventually bankrupt company), I bought a new “Pro” model on EBay for about $140 including fees and shipping. (A new Pro model costs over $600.) After 4 years, it still works well. Over the years, I have bought and sold many items from EBay, all without difficulty and with satisfaction. A new power pack for a notebook computer, a few CD’s and DVD’s, a wireless card, a memory card, a printer, a portable stair stepper, a digital camera – all purchased or sold on EBay without any difficulty. If EBay’s fees were to double tomorrow, I may not give it a second thought.

At work, our staff routinely purchases used modern electronic equipment from newer US production facilities that are being dismantled for less than half the price of new equipment using EBay. Appropriately, we never give any thought to EBay’s fees because they are negligible relative to the good “deal” we are getting on the relatively new equipment.

Unlike Google, EBay has never needed a secondary stock offering. They generate the profits they need through company operations.

In 2002, broadband internet service became available in my neighborhood through Comcast. At over $30.00 per month, it was a heavy “hit”, but my daughters wanted it, so it was installed a week after Comcast made it available. Although now there will soon be competition from Verizon in my neighborhood, our family (especially me) perceives broadband as a necessity. They can raise their prices, and even though I would not be pleased, I would pay up. Last I checked the monthly fee for broadband was closing in on $40.00 a month.

My older daughter told me about Google in 2001. As far as I was concerned it was a good search engine in that it allowed for phrases searches and excluding words in search terms. It was also faster than competing search engines. I was skeptical when it went public because even though it was a good search engine, it was not clear to me how they would earn money. As the stock more than tripled since going public, I still have the same questions. In a conversation with my college student daughter and my brother, they didn’t have any answers about how Google makes money either. My brother related a story where he searched Google to find out where he could get a window air conditioning unit. Through Google, he ascertained that Sears would have what he was looking for. You can buy an air conditioner in Sears. I was not impressed! Since 2001, Google came up with an internet commodity (“gmail”), and a host of other commodity-like features, all of which make Google more like Yahoo. The latest is Google Finance beta, which in my view, is nothing special. The most special feature of Google is the library of videos which are available for free. For example, below are the links for an excellent 3-1/2 hour documentary on the Federal Reserve, prepared by an advocate of a non-debt-based fiat currency. The video is free.

http://video.google.com/videoplay?docid=-4991544789166784731&q=money+masters
http://video.google.com/videoplay?docid=1405312651760707972&q=money+masters

Yet in spite of the cool and useful stuff available on Google, they do not make penny number 1 from M. Goldberg, and except for advertising, it remains unclear how Google plans to make money enough to support their valuation. Google generates cash in much the same manner as the South Sea Company – they are on their 3rd stock offering to the public. And it is amazing to me that Wall Street is not the least skeptical of this company in spite of the fact that they went to the public trough three times in less than two years.

In summary, there are four internet companies that make money from my family and me in various amounts – EBay, Comcast, Amazon, and Yahoo. There is one company, Google, which is valued at more than twice the value of any of the other four. 2006 Google is similar to 1999 AOL, only without the revenues. Maybe I’m not “everyman.” But I can’t figure out how this company is worth its current market value of $117 billion.

Can you?

Today’s Market

As far as I am concerned, all signs suggest that we are now observing the beginning of the helicopter money era. Consider the following intermediate term trends:

• Stocks up.

• Precious metals up.

• Commodities up.

• Bonds down.

• US dollar down.

All of these trends appear to be well-established. And this would be the behavior of the financial markets if the money supply were simply being dropped from helicopters on everything and everyone below. But complacency is also up tremendously as evidenced by the stock market’s inability to turn in even one stinker of a day. So the behavior of the market would also seem to suggest that there is chloroform being dropped from the helicopters. It is also true that Boeing is leading the Dow higher, so there’s more evidence that it is helicopters being used. But then again, maybe not…the Boeing action is probably the market discounting more military activity that is occurring on borrowed money.

I’m hearing so much talk about the fed, and what the fed may do based on the fed’s interpretation of what is best for the US’ economy. I’m far from a fed expert (probably more of an expert than many claiming such a distinction), but the overall assumption that I make in modeling fed behavior is that their overall goal is to enrich those who they represent at the expense of the public. They enrich banking and financial institutions and especially their ownership. The general model is that the fed will, through “monetary policy,” provide loose money conditions to allow portions of the population to do what they otherwise would not do. Usually this is to take on too much debt. In the most recent case, they created the monetary conditions and backdrop (with some media assistance), to entice much of the public to purchase homes with absurd debt structures. Then (now), they tighten policy, thereby shearing the sheep that were enticed into doing what they otherwise would not, thereby resulting in foreclosures. In the extended period of time to run this process full circle, through use of the media, the public is fooled into thinking that everything is AOK. Then when things ultimately come crashing down, through the media, a host of scapegoats are created and paraded about. Say hello to Henry Blodget and Jack Grubman. Wealth is exchanged from the fooled to the fool-ers.

This time, there will also be a host of scapegoats trotted out for the public. One easy target will be the “inflation beastie.” For those of you who remember, it’s time to get out your “WIN” buttons. (I really am going to check out what they are selling for on EBay!) With the breaking of the real estate bubble there won’t need to be any scapegoat – just a statement to those who lost big – “What were you thinking?”

The Fed is putting out signals that they need to “fight” inflation. Up will go interest rates. Down go real estate prices. More foreclosures coming on those properties with the absurd variable interest rate zero principle loans. What were you thinking?

With the 10-year note right at its multi-year highs, I’ve sketched what I think will be the most likely intermediate term scenario for long interest rates. The 10-year note is at its spring of 2004 high after going very far, very fast. The trend is very likely up, but rates probably need to base for awhile, before going higher. A break of the previous high will get the public’s attention and this will likely rock the stock market (which is not confirming the rise in interest rates….Yet). But if rates go decisively higher from here, a resumption of the bear market will occur. The stock market not confirming the bearish bond market is probably the result of the bond market needing more time to catch its breath.

My views on gold and silver stocks have not changed, but from a strategic standpoint, it’s not a good entry point. These are the hazards of trading a Wave III up.

Google hardly moved on news that they are going to the trough again for more money from the public. The excuse? Google’s inclusion in the S&P 500. We’re talking about a new level of complacency in the stock market not seen since 1999. It would be wise to consider that a whole new herd of traders will be sheared by future stock market action. Too many people are too comfortable with the market’s not turning in a stinker of a day since early 2002. Soon the sheep will be sheared. Who will be the scapegoat? In 1987, it was portfolio insurance. This year, it will be short sellers.

Have a great evening.

Martin Goldberg

Copyright © 2006 All rights reserved. Martin F. Goldberg, MS, P.E. Market Analyst Expert Page Commentary Archive Email

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