March 4, 2001
Wanting to see earnings isn't a 180-degree turn, Henry...
http://www.nytimes.com/2001/03/04/business/04BUST.html
As Tech Stocks Fall, Some Analysts Still Optimistic
By SAUL HANSELL
As technology stocks advanced in the last few years, so did Henry Blodget. A
35-year-old with wavy blond hair whose optimism shone as strong as the
market's, he transformed himself from aspiring journalist into one of Wall
Street's best-known analysts and a fixture on CNBC, his pay rising into the
millions.
Today, the market is bloodied, but not Mr. Blodget. His top recommendations
are down 79 percent, on average, from the beginning of last year, with
several trading for less than $1. But Mr. Blodget, the senior Internet
analyst at Merrill Lynch, the nation's largest brokerage, keeps his chin up.
"Things change," he said last week, furrowing his brow after every few
words. "The market went from saying, `We like companies that are growing
quickly but are losing a lot of money' to saying, `We want to see earnings.'
It's very hard to predict a 180-degree turn like that."
Not that Mr. Blodget's picks, often delivered with caveats, were
demonstrably worse than those of some other Internet analysts. Last August,
in fact, he started to turn somewhat more cautious.
But the story of how Mr. Blodget and others like him encouraged investors to
bid stocks up to levels he now admits were unjustifiable goes a long way
toward explaining why the market for technology stocks has since crashed.
Just one year ago this Saturday, the Nasdaq index, the new economy's leading
barometer, peaked at 5,049. On Friday, it closed at 2,117, down 58 percent
over the past 12 months. The sell-off of technology stocks continued to
unfold last week, as did the consequences. Federal Reserve Chairman Alan
Greenspan has said that the market's drop endangers the health of the
economy, as corporations and consumers suddenly find themselves less
wealthy.
Looking back a year after the peak, it is clear that prices were bid up to
astronomical levels in part because of a euphoria infecting not just minor
day traders but international firms like Merrill — and Mr. Blodget, who had
accurately called shots as the market rose, was in the center of it.
"When someone appears to be right, they become larger than life," said Peter
Bernstein, a veteran consultant to big money managers. Watching fortunes
being made from the Internet, investors were looking for reasons to believe
and leaders to follow. Analysts like Mr. Blodget obliged. "All the tinder
was ready waiting for the match to be lit," Mr. Bernstein said.
Indeed, one of the paradoxes of the financial world — and perhaps one of the
explanations for the euphoria that gripped Wall Street during the boom
years — is that Mr. Blodget may have served his employer well by being wrong
over the last year.
It was clear to many market veterans that young companies were being
accorded values based more on fantasy than finance. But the profits being
made by investors and firms were quite real. If Merrill had an analyst
spinning doomsday scenarios, it would not lure high-tech companies as
clients for initial public offerings, among Wall Street's most lucrative
activities. But neither could the company risk legal action by armies of
widows who lost their savings when the bubble burst, as it surely would.
So Mr. Blodget served both audiences. He carefully alternated buy
recommendations and sky-high target prices with cautions about volatility,
and advice for investors to limit their dot-com holdings to just a fraction
of their portfolios. He made headlines when he said 75 percent of Internet
companies would fail.
"I don't think we fanned the euphoria," Mr. Blodget said. "I said over and
over that all trees don't grow to the sky."
Such warnings did not prevent all investor complaints. Debases Kanjilal last
week filed a formal complaint, seeking arbitration, with the New York Stock
Exchange; he blames Mr. Blodget and his firm for hundreds of thousands in
losses on an investment in InfoSpace, an online Yellow Pages. The stock has
fallen 96 percent since Mr. Kanjilal bought it.
Mr. Kanjilal contends that Mr. Blodget was trying to protect a deal Merrill
Lynch had been negotiating. Merrill says the charge is baseless and that Mr.
Blodget did not know about the deal until a few days before it was
announced. Merrill continues to back Mr. Blodget. The firm recently gave him
a choice, added assignment, covering Microsoft, one of the world's most
widely held stocks.
"He is a top-rated analyst of absolute integrity, and Merrill Lynch stands
behind him," Susan McCabe, a company spokeswoman, said.
Though Wall Street analysts are often M.B.A.'s, Mr. Blodget had an
undergraduate degree in history from Yale. Seven years ago, his dreams of a
career in journalism had gone no further than a job as a proofreader for
Harper's magazine.
So Mr. Blodget looked elsewhere. He became a Wall Street trainee, soon
winning a job as an Internet analyst at CIBC Oppenheimer, a small brokerage
firm affiliated with a Canadian bank.
He was much like the young entrepreneurs who started the companies he
follows: he was early to see the rise of the Net and, without much to lose,
he bet his career on it.
In December 1998, he won sudden prominence with an outlandish prediction:
that Amazon.com, then trading at $240, would soon rise to $400. And this for
a company, already up sharply, with no profits in sight.
Merrill Lynch's Internet analyst, Jonathan Cohen, scoffed and said that
Amazon would drop to $50.
Less than three weeks later, Amazon blew past Mr. Blodget's target. His
reputation was made. "I expect my obituary will read, `Henry Blodget comma
who predicted Amazon would hit $400 comma,' " he said.
Shortly thereafter Mr. Cohen left Merrill to become research director at Wit
Capital, a new investment bank, and Mr. Blodget got his job. Through 1999
and well into 2000, Mr. Blodget's recommendations at Merrill all ranged from
"accumulate" to "strong buy." Even with his help, however, Merrill found it
difficult to lure the most promising initial public offerings away from
Goldman, Sachs and Morgan Stanley Dean Witter, which has its own star
analyst in Mary Meeker.
Merrill did win assignments from Internet Capital Group, Pets.com, Buy.com
and Quokka Sports. Mr. Blodget, following Wall Street's custom, gave
favorable ratings to them all.
By March of last year Internet stocks started heading down. Mr. Blodget was
hardly alarmed. Like many investors, he was trained by experience to see
dips as simple precursors to further jumps. So he left his buy ratings
intact.
Many of his favorites rebounded during the early summer. But by August, of
the 29 stocks he followed, the 18 that had been around since Jan. 1 were
down an average of 54 percent. Mr. Blodget then cut his ratings (he
preferred to say "reset") on 11 of the 29, including some that had gone
public through Merrill.
But he maintained his top ratings on companies like Yahoo and InfoSpace,
saying he remained optimistic about the industry.
In October, Mr. Blodget won the highest possible accolade, as money managers
voted him his industry's top analyst, beating out Ms. Meeker.
But he could not command the markets. As the dot-coms continued to fall, he
slowly lowered more of his ratings, often after the companies reported
disappointing results.
This year, the stocks he follows sank further. Of the companies Merrill took
public, with his backing, the most successful, the Internet Capital Group,
is down from a high of $193 to $3.25. Pets.com, which he had strongly
recommended until August, became one of the first prominent dot-coms to shut
down, in November.
Mr. Blodget discounts his role as a promoter. "Demand from investors was so
strong, we didn't have to sell these," he said. "This is what the market
wanted."
He is not one to apologize, instead emphasizing how much money investors
could, for a while, make. "From 1995 to 2000, the real risk was missing the
rise," he said.
He remains convinced that the surviving Internet companies will rebound.
"The PC industry had a nasty bear market from 1983 to 1985, then it snapped
back to create over $1 trillion in market value," he said. "My assumption is
the Internet will be the same."
But last week, Amazon.com hit a two-year low of $9.56 — within a dollar,
adjusting for splits, of where Mr. Cohen, Mr. Blodget's predecessor, said it
would land.
"I wouldn't say I'm vindicated," Mr. Cohen said. "But I'm amused."
---- Adam@KnowNow.ComThere never was a business model [in Napster].
There is a network, which offers a variety of ways to share information.
Napster is an unfolding of the logic of the network in its current form – tapping into its inexhaustible riches – people’s hard drives.
There never was a business model. There was a community of people driven by love of music, discovering shared enthusiasms, new artists and old works of genius that the RIAA cartel had seen fit to forget or ignore.
An awful lot of real people were sharing music they loved – Monteverdi or Metallica – simply that.
To build itself, the community required no marketing, no clever advertising. All it needed was a certain freedom from restraints, artificial controls, gatekeepers, marketers, toll booths.
It required freedom. Not cheapskate freedom from paying, but Dionysian freedom from external organizing control. Freedom from somebody else’s distinction between personal use and network sharing. Freedom from somebody else’s power to select and direct.
The issue then would be to try to respect and work with this community. Napster Inc. failed to do this the moment it conceived a business model to exploit, rather than serve, the community.
Once a community has formed, like a pearl around an oyster, who has the right to regulate it into oblivion?
There never was a business model.
There was a community.
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