The 10 Biggest Internet Myths

Tim Byars (tbyars@earthlink.net)
Fri, 24 Sep 1999 12:54:19 -0700


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http://fnews.yahoo.com/street/99/09/24/wrong_990924.html

So, without further ado, let me blow away the 10 biggest myths of the
Internet, with the hopes that I can save you money as an investor or a
trader in Net stocks:

1. It's cheap to do business on the Web. As I say in my column,
Wrong!, which appears as often as 10 times a day in TheStreet.com, it
is phenomenally expensive to run a fresh, continually interesting, Web
site. First of all, the technology itself is positively Linotype --
that's the old-fashioned hot graphic way of printing newspapers. To
change even one line of bold type on our site requires a massive
overhaul. To reconfigure pages is almost impossible. A redesign is
incredibly costly and involves massive interaction with a costly host,
who wants nothing to do with your changes or your people. The lines of
code, the time it takes to rewrite them and the reconfigurations are so
cumbersome and cloddy that it is almost impossible to be nimble and
flexible on a Web site.
The good news though is that it used to be like Gutenberg when we
started, if you can understand that magnitude of improvement. Our first
design, out of date within a month, took a year before we could fix it
up to our satisfaction. I could change the look and feel of the Sistine
Chapel more cheaply, more quickly and more artfully than I can change
the simplest aspects of our Web site. Those who would tell you
otherwise are simply hunting for a chunk of ill-gotten action
themselves. They won't do it better either. Don't believe otherwise.
This Web thing is a cumbersome, slow, expensive product that won't get
better until the phone companies, the computer companies, the Internet
service providers and the network companies all get on the same page.
Which could be years from now. They all read from far different books
at this time.

2. Advertising is flocking to the Web in record numbers and will be
the Web's savior. Here is a totally false assertion. We are still at
the client level when it comes to advertising, meaning that almost no
agency is placing ads on sites. You have to appeal directly to the
client for the ads. Here it is, year three, and we are still doing
missionary work. And you only get their attention if the client's
grandchildren think the Web is cool. The people who run big advertising
companies that are not in tech aren't even on the Web.
You always know when you are dealing with one of those closet
Web-o-phobes. You get their business cards and it doesn't have an email
address. These people want nothing to do with the intimate nature of
the Web. They have their secretary on the Web for them. What a joke!
The Web is a personal experience, yet it is one that is not being
experienced firsthand by the current generation of people who run ad
dollars. And it won't be until they die off or retire. The ad revenues
are totally anemic. And they will stay that way for one main reason:
Most of the Web is free. The vast majority of advertisers don't want to
appear on free sites. They don't trust them. They think the numbers are
made up. They want to be in expensive publications or productions with
big barriers to entry and wealthy readers. Not Web penny-savers. I know
when I talk to portfolio managers about TheStreet.com they say, hey,
what is the deal with the paid model? You should be free. To which I
say, fine! , we go free, we not only kill our most reliable revenue
stream -- the subscriber stream with its 93% renewal rate -- but our
advertisers will desert us in a flash. Our subscription model is
precisely why we have been so successful in getting ads while others
have failed miserably.
The traditional advertisers hate appearing in free publications. They
like proven high-net-worth demographics that only a paid model can
deliver. But these portfolio managers and analysts, unsure of how to
value companies like mine and mesmerized by Media Metrix (Nasdaq:MMXI -
news) , think that you can make it up in eyeballs. They don't take
eyeballs at the bank. They take cash. Free generates no cash from subs
or ads, unless you are lucky enough to be Yahoo!. And it only works for
Yahoo! because Yahoo! has won the battle over reach. All the rest of
the sites have lost it already!! It's time we started admitting that,
too!!!

3. You can give away the merchandise as long as you generate enough
eyeballs because one day you will monetize those eyeballs. Here is
another pack of lies. The eyeballs are meaningless in the world of
business and they will never be worth the merchandise you are giving
away for virtually nothing. You will never have gross margins that
rise, and the pageview can never be monetized. No one will pay you for
them other than if you are willing to receive another dot-com's stock!
So if you are giving away books for 50% below posted price, you aren't
going to make it up anywhere else. You are just going to lose a
fortune. All of the e-commerce sites out there with one revenue stream
-- potential advertising -- won't exist two years from now. Nobody, and
I reiterate -- literally nobody else -- gets enough advertising for it
to be a lasting business. Those who value stocks by eyeballs should go
be ophthalmologists, not stock analysts. They won't make you any money
in this market.!

4. You have a clever URL, they will come. Wrong again!! People will
only come if you interact with them successfully, which is an expensive
and time-consuming process that requires great customer service and a
level of attention to detail by senior management that most new firms
just don't have. At least 30 companies have come public this year on
the strength of their catchy URLs. But this is meaningless. Nobody
surfs the Web for URLs. If you want traffic you have to buy traffic and
you have to interact with that traffic one-on-one, around the clock,
once it is in the cyberdoor. You have to force people to notice you and
go to you and when they get there they have to be pampered and made to
feel that there is someone behind the URL in order to build brand
loyalty. And no company, with the exception of Barnes & Noble (NYSE:BKS
- news) , has raised enough mon! ey to be able to get those people to
come in and remain loyal without interaction with customers by all
levels of management. The companies that issued a few million shares
here and there to make and keep the stock hot will burn through that
cash in no time trying to service their clients.

5. Traditional advertising brings eyeballs to the Web and generates
bountiful traffic. This is totally false. I have spent more time on TV
networks, cable, local access -- you name it -- pushing our site than
anyone has pushed any site anywhere. But we have minute-by-minute
traffic collections in TheStreet.com's database that show virtually no
increase, or mere incremental increases from TV advertising and even my
appearances. It just doesn't happen. People don't watch TV and work on
their computer. They are in different rooms. Print is even worse. It
doesn't work at all. There is no correlation between print ads and
traffic.
But Web advertising and Web promotions, they drive serious amounts of
traffic. As Web ad prices come down, the real bargain for driving
traffic will be from other Webs sites. Everything else is a waste of
money as far as I am concerned. And billions are being wasted trying to
drive traffic via old fashion advertising. Better to pay people
individually to come to the sites! Email word of mouth among satisfied
customers is the most effective way to build traffic, and that can only
be done by offering an intensely personal customer experience that most
sites don't have.
Ad campaigns centered on Web ads, coupled with customer service of the
highest touch, is the way to go. You click on any name on any site in
the universe except for TheStreet.com and you get a canned response
that will never be touched by a live human. You click on any name on
our site and I guarantee you almost instant turnaround from a live
human, including me. That's because you are a member and a customer
when you sign up for our service, not a pageview or an eyeball.

6. People like to shop on the Web. Nonsense. People love to shop in
stores. They just don't want to have to interact with salespeople and
they don't want to pay sales tax. Shoppers hate the register. They love
not being sold to and not waiting in line. But as far as Web shipping
experience, forget it. It is soulless and rates about par with the home
shopping experience, except for books, second hand stuff, and goods
that could be ordered by catalogue and phone anyway, the advantage
being you don't have to speak to a rep who knows nothing or cares
nothing about you and wants you to buy more than you want to. Of
course, if you are going to give stuff away at low prices in order to
capture eyeballs, you will end up losing both on the product end and
the advertising end, and I will short you until the cows come home.
That's why great retailers have nothing to fear from the Web, but those
with reputations for shoddy service will get annihilated.

7. It costs nothing to get a site up and running. Forget it. These
days, almost no one but the richest companies can afford to staff a new
large-scale Web site business. We lose a programmer, we can hardly
afford to replace him. Just to hire an investor-relations professional
costs us hundreds of thousands of dollars. The market for Web
professionals is so thin that you have to pay fortunes to get anybody
with a brain and then top that off with a hefty dollop of stock
options. And once you get them, they tend not to know as much as you
thought they did! It is expensive to open the doors every day. The
labor shortages and labor costs for the lowest level programmers and
execs are totally out of control. Just mind-boggling.

8. The Web is a reliable commercial activity. Oh boy, is this ever
wrong! The Web goes down constantly. The providers let you down
constantly. Some of the greatest names, including multibillion-dollar
companies that shall go nameless lest there be an exodus of customers,
can't deliver the product regularly with precision. The downtime would
simply be unforgivable even if it were some remote cable access station
in North Podunk, Ky.

9. Just you wait, the profitability is right around the corner. Most
companies are pushing out profitability, as we speak, to sacrifice for
reach -- reach that only Yahoo! will ever have. But attempts at mass
reach won't pay the bills when you get there. It is why, even though I
am now just a lowly director at TheStreet.com (Nasdaq:TSCM - news) , I
focus intensely on cutting costs and saving money because only that way
will revenues ever extend to profitability. It is why when we sit down
at board meetings, we talk chiefly about how to get to profitability
fast -- faster than anybody expects. The lines will never cross if you
are thinking that reach alone will put you in the black. Tell Wal-Mart
(NYSE:WMT - news) about reach. Tell Home D! epot (NYSE:HD - news) .
They will tell you that what matters is profitability, not reach. They
are in the same world that I am in. There is no cyberworld where reach
trumps profits.

10. And this is the biggest, as far as I can tell. People will never
pay for content over the Web. That is totally wrong and is based on the
current print world's shaky margin structure. In fact, without that
second revenue stream, your business will never amount to a hill of
beans. So why do people think you can't charge for stuff on the Web? I
have a suspicion. The print world knows that there is not enough
advertising on the Web. It knows that the Web is a superior, cheaper,
more fully featured experience than print. But it can't get the
advertisers to migrate. So it puts the same stuff that people already
pay for in print on the Web. It simply repackages it. And then it
pronounces the Web unpayable. Of course no one will pay a second time
for what they already pay for. But if you give them fresh stuff they
can't get elsewhere, they are more than content to pay. Other than
TheStreet.com and one or two other sites, though, everything that is
available on the Web i! s available in print. Why pay for it a second
time? Yet every week we receive thousands of dollars in revenue from
eager and willing buyers who thirst for original material on the Web
and get it nowhere else. It is a very winning model. In fact, next year
will be the year when these free sites began to cannibalize the paid,
hard-copy versions, and you will see a margin decline that will knock
your socks off. The dead-tree competitors are trapped and we are coming
in for the kill.

So what is the state of Web investing? I think it is pretty simple. If
you want to know who will survive, you need only ask who has more than
one potentially profitable revenue stream. If you find a Web business
with just one revenue stream, that business will fail. If you find a
business that does not include interaction with people at the highest
level, that will fail. And if you find a business, and here I have
quotation marks around business, that wouldn't look like a business if
it were off the Web, don't be fooled. It isn't one. It never will be. I
will be selling you short all the shares you need of it from my trading
turret at my hedge fund. And I promise you, I will never have to cover.

--

Suck it up, tuck it in, and up the dosage.

<>tbyars@earthlink.net <> --============_-1273919544==_ma============ Content-Type: text/enriched; charset="us-ascii"

<bold>http://fnews.yahoo.com/street/99/09/24/wrong_990924.html

</bold>So, without further ado, let me blow away the 10 biggest myths of the Internet, with the hopes that I can save you money as an investor or a trader in Net stocks:

1. It's cheap to do business on the Web. As I say in my column, Wrong!, which appears as often as 10 times a day in <italic>TheStreet.com</italic>, it is phenomenally expensive to run a fresh, continually interesting, Web site. First of all, the technology itself is positively Linotype -- that's the old-fashioned hot graphic way of printing newspapers. To change even one line of bold type on our site requires a massive overhaul. To reconfigure pages is almost impossible. A redesign is incredibly costly and involves massive interaction with a costly host, who wants nothing to do with your changes or your people. The lines of code, the time it takes to rewrite them and the reconfigurations are so cumbersome and cloddy that it is almost impossible to be nimble and flexible on a Web site.

The good news though is that it used to be like Gutenberg when we started, if you can understand that magnitude of improvement. Our first design, out of date within a month, took a year before we could fix it up to our satisfaction. I could change the look and feel of the Sistine Chapel more cheaply, more quickly and more artfully than I can change the simplest aspects of our Web site. Those who would tell you otherwise are simply hunting for a chunk of ill-gotten action themselves. They won't do it better either. Don't believe otherwise. This Web thing is a cumbersome, slow, expensive product that won't get better until the phone companies, the computer companies, the Internet service providers and the network companies all get on the same page. Which could be years from now. They all read from far different books at this time.

2. Advertising is flocking to the Web in record numbers and will be the Web's savior. Here is a totally false assertion. We are still at the client level when it comes to advertising, meaning that almost no agency is placing ads on sites. You have to appeal directly to the client for the ads. Here it is, year three, and we are still doing missionary work. And you only get their attention if the client's grandchildren think the Web is cool. The people who run big advertising companies that are not in tech aren't even on the Web.

You always know when you are dealing with one of those closet Web-o-phobes. You get their business cards and it doesn't have an email address. These people want nothing to do with the intimate nature of the Web. They have their secretary on the Web for them. What a joke! The Web is a personal experience, yet it is one that is not being experienced firsthand by the current generation of people who run ad dollars. And it won't be until they die off or retire. The ad revenues are totally anemic. And they will stay that way for one main reason: Most of the Web is free. The vast majority of advertisers don't want to appear on free sites. They don't trust them. They think the numbers are made up. They want to be in expensive publications or productions with big barriers to entry and wealthy readers. Not Web penny-savers. I know when I talk to portfolio managers about <italic>TheStreet.com</italic> they say, hey, what is the deal with the paid model? You should be free. To which I say, fine! , we go free, we not only kill our most reliable revenue stream -- the subscriber stream with its 93% renewal rate -- but our advertisers will desert us in a flash. Our subscription model is precisely why we have been so successful in getting ads while others have failed miserably.

The traditional advertisers hate appearing in free publications. They like proven high-net-worth demographics that only a paid model can deliver. But these portfolio managers and analysts, unsure of how to value companies like mine and mesmerized by <bold>Media Metrix</bold> (Nasdaq:<color><param>0000,0000,C0C0</param>MMXI</color> - <color><param>0000,0000,C0C0</param>news</color>) , think that you can make it up in eyeballs. They don't take eyeballs at the bank. They take cash. Free generates no cash from subs or ads, unless you are lucky enough to be Yahoo!. And it only works for Yahoo! because Yahoo! has won the battle over reach. All the rest of the sites have lost it already!! It's time we started admitting that, too!!!

3. You can give away the merchandise as long as you generate enough eyeballs because one day you will monetize those eyeballs. Here is another pack of lies. The eyeballs are meaningless in the world of business and they will never be worth the merchandise you are giving away for virtually nothing. You will never have gross margins that rise, and the pageview can never be monetized. No one will pay you for them other than if you are willing to receive another dot-com's stock! So if you are giving away books for 50% below posted price, you aren't going to make it up anywhere else. You are just going to lose a fortune. All of the e-commerce sites out there with one revenue stream -- potential advertising -- won't exist two years from now. Nobody, and I reiterate -- literally nobody else -- gets enough advertising for it to be a lasting business. Those who value stocks by eyeballs should go be ophthalmologists, not stock analysts. They won't make you any money in this market.!

4. You have a clever URL, they will come. Wrong again!! People will only come if you interact with them successfully, which is an expensive and time-consuming process that requires great customer service and a level of attention to detail by senior management that most new firms just don't have. At least 30 companies have come public this year on the strength of their catchy URLs. But this is meaningless. Nobody surfs the Web for URLs. If you want traffic you have to buy traffic and you have to interact with that traffic one-on-one, around the clock, once it is in the cyberdoor. You have to force people to notice you and go to you and when they get there they have to be pampered and made to feel that there is someone behind the URL in order to build brand loyalty. And no company, with the exception of <bold>Barnes & Noble</bold> (NYSE:<color><param>0000,0000,C0C0</param>BKS</color> - <color><param>0000,0000,C0C0</param>news</color>) , has raised enough mon! ey to be able to get those people to come in and remain loyal without interaction with customers by all levels of management. The companies that issued a few million shares here and there to make and keep the stock hot will burn through that cash in no time trying to service their clients.

5. Traditional advertising brings eyeballs to the Web and generates bountiful traffic. This is totally false. I have spent more time on TV networks, cable, local access -- you name it -- pushing our site than anyone has pushed any site anywhere. But we have minute-by-minute traffic collections in <italic>TheStreet.com's</italic> database that show virtually no increase, or mere incremental increases from TV advertising and even my appearances. It just doesn't happen. People don't watch TV and work on their computer. They are in different rooms. Print is even worse. It doesn't work at all. There is no correlation between print ads and traffic.

But Web advertising and Web promotions, they drive serious amounts of traffic. As Web ad prices come down, the real bargain for driving traffic will be from other Webs sites. Everything else is a waste of money as far as I am concerned. And billions are being wasted trying to drive traffic via old fashion advertising. Better to pay people individually to come to the sites! Email word of mouth among satisfied customers is <italic>the</italic> most effective way to build traffic, and that can only be done by offering an intensely personal customer experience that most sites don't have.

Ad campaigns centered on Web ads, coupled with customer service of the highest touch, is the way to go. You click on any name on any site in the universe except for <italic>TheStreet.com</italic> and you get a canned response that will never be touched by a live human. You click on any name on our site and I guarantee you almost instant turnaround from a live human, including me. That's because you are a member and a customer when you sign up for our service, not a pageview or an eyeball.

6. People like to shop on the Web. Nonsense. People love to shop in stores. They just don't want to have to interact with salespeople and they don't want to pay sales tax. Shoppers hate the register. They love not being sold to and not waiting in line. But as far as Web shipping experience, forget it. It is soulless and rates about par with the home shopping experience, except for books, second hand stuff, and goods that could be ordered by catalogue and phone anyway, the advantage being you don't have to speak to a rep who knows nothing or cares nothing about you and wants you to buy more than you want to. Of course, if you are going to give stuff away at low prices in order to capture eyeballs, you will end up losing both on the product end and the advertising end, and I will short you until the cows come home. That's why great retailers have nothing to fear from the Web, but those with reputations for shoddy service will get annihilated.

7. It costs nothing to get a site up and running. Forget it. These days, almost no one but the richest companies can afford to staff a new large-scale Web site business. We lose a programmer, we can hardly afford to replace him. Just to hire an investor-relations professional costs us hundreds of thousands of dollars. The market for Web professionals is so thin that you have to pay fortunes to get anybody with a brain and then top that off with a hefty dollop of stock options. And once you get them, they tend not to know as much as you thought they did! It is expensive to open the doors every day. The labor shortages and labor costs for the lowest level programmers and execs are totally out of control. Just mind-boggling.

8. The Web is a reliable commercial activity. Oh boy, is this ever wrong! The Web goes down constantly. The providers let you down constantly. Some of the greatest names, including multibillion-dollar companies that shall go nameless lest there be an exodus of customers, can't deliver the product regularly with precision. The downtime would simply be unforgivable even if it were some remote cable access station in North Podunk, Ky.

9. Just you wait, the profitability is right around the corner. Most companies are pushing out profitability, as we speak, to sacrifice for reach -- reach that only Yahoo! will ever have. But attempts at mass reach won't pay the bills when you get there. It is why, even though I am now just a lowly director at <bold>TheStreet.com</bold> (Nasdaq:<color><param>0000,0000,C0C0</param>TSCM</color> - <color><param>0000,0000,C0C0</param>news</color>) , I focus intensely on cutting costs and saving money because only that way will revenues ever extend to profitability. It is why when we sit down at board meetings, we talk chiefly about how to get to profitability fast -- faster than anybody expects. The lines will never cross if you are thinking that reach alone will put you in the black. Tell <bold>Wal-Mart</bold> (NYSE:<color><param>0000,0000,C0C0</param>WMT</color> - <color><param>0000,0000,C0C0</param>news</color>) about reach. Tell <bold>Home D! epot</bold> (NYSE:<color><param>0000,0000,C0C0</param>HD</color> - <color><param>0000,0000,C0C0</param>news</color>) . They will tell you that what matters is profitability, not reach. They are in the same world that I am in. There is no cyberworld where reach trumps profits.

10. And this is the biggest, as far as I can tell. People will never pay for content over the Web. That is totally wrong and is based on the current print world's shaky margin structure. In fact, without that second revenue stream, your business will never amount to a hill of beans. So why do people think you can't charge for stuff on the Web? I have a suspicion. The print world knows that there is not enough advertising on the Web. It knows that the Web is a superior, cheaper, more fully featured experience than print. But it can't get the advertisers to migrate. So it puts the same stuff that people already pay for in print on the Web. It simply repackages it. And then it pronounces the Web unpayable. Of course no one will pay a second time for what they already pay for. But if you give them fresh stuff they can't get elsewhere, they are more than content to pay. Other than <italic>TheStreet.com</italic> and one or two other sites, though, everything that is available on the Web i! s available in print. Why pay for it a second time? Yet every week we receive thousands of dollars in revenue from eager and willing buyers who thirst for original material on the Web and get it nowhere else. It is a very winning model. In fact, next year will be the year when these free sites began to cannibalize the paid, hard-copy versions, and you will see a margin decline that will knock your socks off. The dead-tree competitors are trapped and we are coming in for the kill.

So what is the state of Web investing? I think it is pretty simple. If you want to know who will survive, you need only ask who has more than one potentially profitable revenue stream. If you find a Web business with just one revenue stream, that business will fail. If you find a business that does not include interaction with people at the highest level, that will fail. And if you find a business, and here I have quotation marks around business, that wouldn't look like a business if it were off the Web, don't be fooled. It isn't one. It never will be. I will be selling you short all the shares you need of it from my trading turret at my hedge fund. And I promise you, I will never have to cover.

--

Suck it up, tuck it in, and up the dosage.

<<>tbyars@earthlink.net <<>

--============_-1273919544==_ma============--