FEBRUARY 7, 2000 VOL. 155 NO. 5

V I E W P O I N T
New Eras: All Too dot.common
What's pumping up Internet-company valuations? Hot air
By MARC FABER

What should we think of the global euphoria over "dotcom" companies? Undoubtedly, Internet technology will change the way we live, work, communicate and do business. But beware of those who proclaim this to be a New Era of profitability. As in the so-called New Eras of the past--brought on by earlier technological breakthroughs--this one carries the seeds of its own destruction. The phenomenal growth of Internet businesses is already fueling a Klondike-style gold rush, with far too many diggers looking for far too little gold. Most Internet companies are likely to be out of business just as quickly as they become investors' darlings. And those that survive aren't likely to achieve any meaningful earnings. Economics teaches us that it is hard to make money with a basically free commodity. Think of ice in the Arctic, sand in the desert, seawater in the ocean or, for that matter, the seemingly unlimited "hot air" on the Net.

ALSO IN TIME

Cover: Dotcom Mania As Asia's Internet start-ups race toward lucrative listings, investors have dollar signs in their eyes • First, Create the Hot Start-up: Helloasia.com's founders think they can make their red-hot site 'sticky' and profitable • Then Pray for The Angel: After a midlife career change, investor Jim Mellon is looking for a few good ventures • Next, Call in The Venture Capitalist: AsiaTech takes high-stakes gambles on Internet firms • Cozy Up with The Incubator: A Hong Kong financier and his British partner hope to nurture the next big things • Now You Are Ready for The Listing: Hong Kong debut endures rough ride on the market • Or, You Can Just Sell Out: Eschewing an IPO, an Indian entrepreneur gives up his portal for a quick pot of cash Beijing Tries to Build Barriers Regulating the Internet Viewpoint: New Eras All Too dot.common What's pumping up Internet-company valuations? Hot air Viewpoint: The Sound of Asia Booming In this online exclusive, Bob Davis, president and CEO of Lycos, gives his take on the growth of Asia's Internet economy

Consider what inspired the New Eras of yore: the discovery voyages of the 15th century, the construction of canals and railroads, the introduction of electricity and the telephone. In the 20th century, the proliferation of cars, radios, movies, televisions, mass retailers and computers all inspired a sense that we had begun a New Era. Each breakthrough promised new riches and unprecedented prosperity for the innovators. But in the long run, they always failed to deliver to investors the expected rewards.

Why the letdowns? In part because every great innovator invariably attracted great imitators, who competed with the original and eventually depressed his "excessive" profit margin by commoditizing the invention. Furthermore, great inventions have always been followed by greater innovations, which, through the process known as creative destruction, render the previous new technology obsolete. And when inventions become vital to the economy, they are frequently brought under the control of governments via regulation, nationalization and, in extreme cases, expropriation.

Take the Erie Canal, which was completed in 1825. Its success led to the great American canal boom of the 1830s. It ended just a few years later in a tremendous bust, as most of the other canals failed to make money. The Erie, too, began to suffer from competition, first from railroads and, eventually, from trucks. Subsequently, the railroad industry endured a similar fate. The success of the first lines prompted imitators to build countless new ones, frequently from "nowhere to nowhere." In the second half of the 19th century, freight rates collapsed by 90%. Over-regulation and the proliferation of automobiles would make things worse. In the end, the railroad industry--which helped create an unprecedented industrial boom--proved to be disastrous for most investors. By 1895, most U.S. railroads had to be restructured or were in receivership; outside the U.S., the carnage was even greater.

Now-familiar technologies like cars, radios, cash registers and mainframe computers were all at some point new and revolutionary. But the spread of the technologies led inevitably to the demise of their creators' "excessive" profits, as each became just another commodity. Don't think for a minute that the Internet will be any different.

Marc Faber is the editor of the Gloom, Boom and Doom Report

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