Networker: The bubble is still to burst
The bubble is still to burst
It's that time of year again, when all the stupendously overpriced internet-related stock prices crash. For the second year in a row, a huge rise in high technology share prices has ended a six month run, leaving many investors in ruins.
While some suggest that this is the end of the internet stock "bubble", the actual situation is more confusing.
Last week saw the first major collapse of a European internet company (or "dot com"). Boo.com was an on-line sportswear retailer. Last year the company was given $US135 million by its investors. When it threw in the towel on May 17 it had $500,000 left. The rest had been spent, mostly on advertising. In their whole existence they only sold $1 million or so of clothing. So what went wrong?
One of the main problems for internet businesses is that the expected cheaper costs of distribution don't eventuate. All "virtual" companies selling physical things over the internet (as opposed to information) are caught in a dilemma: in a "real" shop, shoppers are the "virtual" workers. They collect the goods off the shelves, take them to the check-out, and then take them home.
In a "virtual" shop, the shopper's order is received. Real workers then need to take the order, go to the shelves and select the products, take it through some sort of check-out process, and then deliver it to the shopper's home.
From time to time you will see a report on a fully automated warehouse where robots get items off shelves according to programmed instructions. For the foreseeable future, low-paid workers are a cheaper approach.
For such a prominent company, the unusual feature of Boo.com was that it had a small number of investors who could see that they had done their dough. Rather than pump in a few more tens of millions to keep a dead company on life support, they just said no.
That is different from the majority of public dot com companies in three ways. First, there is generally no ongoing public information available for small investors. Second, many small investors haven't the slightest idea of how to survive in a stock market dominated by much larger players so wouldn't necessarily pay any attention to warnings if they got them.
Third, while small high-tech traders are quick to grab a profit when stocks are rising, they are notoriously slow to cut their losses as the stock falls. This is the wishful thinking of an addicted gambler hoping to "win back" their losses, often because they can't afford these losses.
Part of the new landscape of internet start-up companies and dot coms is the "internet incubator". These are investor groups who work on picking winners from the huge number of new companies emerging. They groom likely small company candidates (such as eToys) for a public launch.
NewMedia Spark is one such group. Commenting on the failure of Boo.com, its chief executive told the London Financial Times that "more than 70% of current internet-related companies will go out of business within two years".
Already the most recent market slump has sent a large number of new companies scurrying for cover. But caution is unlikely to remain for long.
Within a few months we can expect to see enthusiasts pointing out that even after the crash, many high-tech values are still much higher than they were a year or two years ago. That is true.
The other truth is that as investors charge back into these dangerous waters, most of the stocks they are dealing with have no intrinsic value at all. The bubble hasn't burst. That is still to come.
By Greg Harris