The Next Wave for Tech Investors: More Net
If history is a guide, the next wave in high-tech may offer a great ride or put you underwater--depending on whether you choose wisely.
Epic technologies such as Microsoft’s operating system and Cisco’s computer networks redefined growth investing. But those who put their faith and assets into “can’t miss” ideas like pen software and desktop videoconferencing were left with little more than a lesson in caution.
The current tech-stock market is riding the tsunami called the Internet. No one knows how long this roiling sector will stay buoyant, but tech investors, always on the lookout for innovations that give birth to lucrative new industries, might be wondering: After the Net, what’s next?
The answer: More Net.
The next waves, according to analysts, venture capitalists and other experts, are business-to-business e-commerce and information appliances.
The first comes on the heels of booming consumer-oriented Web vendors like Amazon.com. The second is about extending Net access beyond the unwieldy personal computer. Legions of start-ups, along with established powers, are conceiving hand-held devices, TV set-top boxes and Internet phones along with services linked to them.
Most of the companies in both groups are private and still being groomed by venture capitalists, who place their bets on ideas they hope pay off years down the road. Some of those that are public, like VerticalNet in corporate e-commerce and InfoSpace.com in services for appliances, boast valuations saturated with great expectations.
Cisco Systems, which sells much of its networking gear online, and 3Com, which makes the Palm hand-held computer, show that demand is already there. Yet it’s not always clear when, or if, the broad market for a new idea will jell, when the wave will hit.
“New technology markets can seem closer than they really are,” said Jonathan Funk of Media Technology Ventures in Los Angeles. For instance, look at deployment of broadband Internet access. There’s digital subscriber line and cable modems. They seem immediate, but both are still two to three years away from mass roll-out. You’ve got to be careful as an investor so you don’t take arrows in your back.
Promises, Payoffs
For sellers, the promise of business-to-business e-commerce is a more efficient, lower-cost customer relationship. For buyers willing to forgo the handshake and the human touch, the payoff is speed, reliability, greater access to information and lower prices. But the challenge for both parties is re-engineering the process--from price setting and customization to approvals and delivery--involved in a seven-figure deal between large organizations.
Though it has been slower in coming than consumer e-commerce, the opportunity is much larger. Forrester Research of Cambridge, Mass., predicts that U.S. business-to-business e-commerce, including services, will account for $1.5 trillion by 2003, versus $108 billion for business-to-consumer.
Once these systems are established, they will be entrenched, says Emeric McDonald, co-manager of the Amerindo Technology fund. The portfolio, filled with e-commerce plays, surged 85% in 1998.
“Consumer-oriented Web sites base their competitive advantage on brand”, McDonald said. “In the business-to-business world, the competitive advantage will be based on brand as well as embedded infrastructure.” In other words, you can get the same book from Amazon and Barnesandnoble.com, but a “B2B” site might be locked into its back-office software.”
Analysts say three corporate e-commerce areas bear watching: virtual marketplaces that bring buyers and sellers together; software that gives Web sites the skills to make a sale; and tools for using the XML computer language, which is becoming the medium of choice for B2B transactions.
Software from Ariba and CommerceOne automates the electronic give-and-take between corporate purchasers and their suppliers. Both are expanding into what Forrester analyst Bruce Temkin calls “dot-com marketplaces” Web-based hubs that many companies’ procurement systems can plug into.
Though its revenue is negligible, VerticalNet received a warm welcome when it launched its IPO in February. The company is the first to build a cluster of meeting places for buyers and sellers in various industries, or “verticals,” supported by sophisticated product information.
VerticalNet has begun hosting transactions by auction at 15 of its 35 sites. Admirers like Munder NetNet fund co-manager Alan Harris say the company is poised to evolve into a commerce super-site.
Another spectacular IPO of early 1999, Vignette, provides key technology in two areas. Its content-management software tailors, or “personalizes,” information at vendor sites to each visitor. Vignette software also enables components of one Web site to function inside another, like an ATM in a grocery store.
Calico Technology’s configuration software allows Cisco to customize its products to Web buyers’ specifications. The niche is considered vital to the blossoming of B2B, so Calico could get plenty of buzz if it goes public this year, as expected.
Silknet software automates customer service on the Web, addressing a need that is often called the weak link of e-commerce. CMGI, the venture group that nurtured Lycos and GeoCities, is a large investor in Silknet, which went public only last Wednesday.
Another piece of the B2B puzzle falling into place is the adoption of XML as the language of machine-to-machine Web transactions. “This is a critical technology for the future,”Temkin said. “Companies exchange a lot of data to do business. As Web business grows, they will share a lot more.”
From Ariba to Microsoft, the architects of B2B are building applications on this new standard. WebMethods and Poet Software are among the young companies supplying XML tools.
Spreading Web
The expected surge in all forms of e-commerce goes hand-in-hand with the Web becoming as accessible as a dial tone.
International Data Corp., a Framingham, Mass., research house, expects 55 million Web-enabled non-PC devices to be sold in the U.S. in 2002, including Internet TVs and palm-sized appliances.
Merrill Lynch analyst Steven Milunovich has no doubt that smart gadgets will proliferate, even as traditional PCs are given away.
“There are two principles here,” he said. “The first is simplicity. The PC is too complex to use because it’s a general-purpose platform. Appliances are by their nature low-cost and easy to use.”
“The second is focus. We started with mainframes, moved to minicomputers and PCs. The market naturally divides into specialized devices.”
The timetable is uncertain, but when information appliances do take off, the changes will ripple through the semiconductor, Web services and telecom worlds, says Craig Canine, managing editor of ComputerLetter, a publication of Technologic Partners. We will have many kinds of Web traffic specific to many devices and purposes. The problem now is figuring out what consumers want, what combinations of functionality are compelling.”
Danny Rimer, an Internet analyst with investment bank Hambrecht & Quist, says the devices will be a low-margin business, perhaps similar to cell phones, which are often subsidized or given away with service contracts.
He urges investors to focus on software that links high-powered servers to the appliances, which may be little more than a delivery vehicle for the applications beaming through the network.
Nevertheless, hardware can bring cash flow in this arena. 3Com enjoys strong sales of its Palm, and the popularity of Diamond Multimedia’s Rio, a device that downloads music from the Web in MP3 format, is touted as evidence of consumers’ openness to Net gadgets.
Cellular handset giants Motorola, Ericsson and Nokia are planning Web-linked cell phones with an operating system from Britain’s Psion. Some of these phones are expected to integrate technology from Tegic that lets keypads function as computer keyboards.
Among chip makers, Texas Instruments and Motorola have footholds, and Intel is attempting to broaden the use of its StrongARM processor for hand-helds and its Celeron for set-top boxes. Emerging silicon specialists like IReady and MediaQ are also staking claims.
MediaQ produces chips to sharpen on-screen graphics in non-PC devices. IReady designs a so-called Internet tuner, which Toshiba integrates into its chips to cheaply link consumer electronics products to the Web. Milunovich sees opportunities for Wind River Systems, whose software guides chips in such disparate devices as alarm clocks and traffic signals.
Microsoft has a big presence in the still-small market for unified TV and Internet service. An alternative comes from Network Computer Inc., the brainchild of Oracle Chairman Lawrence Ellison. NCI software is in Internet set-top boxes in Japan and Europe, and the company is working with US West to integrate telephone, TV and Web services.
Software start-ups AvantGo, Online Anywhere and ProxiNet are tackling the problem of reformatting and filtering Web content for hand-held computers, which have a fraction of a PC’s processing power. Online Anywhere recently struck a deal with Yahoo to extend the portal’s services beyond the PC.
“A company like Online Anywhere makes it possible for big Web publishers to be accessible through small devices,” Canine said. “Yahoo is clearly anticipating this transition.”
Hambrecht & Quist’s Rimer is a fan of InfoSpace.com, an outsourcing play he calls “a primary beneficiary of the PC-plus revolution.” The company provides big Web sites with information mobile users need, like phone directories and restaurant listings, customizing the data for various sites and for small screens.
How will the giants fare as the market shifts? Microsoft, Intel and IBM are throwing more resources at the non-PC arena, but Milunovich, Harris and others say Sun Microsystems is positioned best.
The pact that Sun signed last fall with America Online brings this vision closer to reality. AOL’s plan to reach consumers everywhere through information appliances relies on Sun’s servers to host content and applications and Sun’s Java and Jini software to operate and link the gadgets.
Indeed, Sun chief Scott McNealy has called the PC era “just a blip.”
Milunovich almost concurs: “It’s another paradigm shift,” the Merrill analyst said. “The PC is caught in the middle. The money in the computer industry will increasingly be made above and below the PC, in the network and the appliances.”
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Wave Riders
Most companies involved in the emerging business-to-business e-commerce and information appliance sectors are private, but the following table lists several that are traded on Nasdaq. Each company’s analyst consensus rating is measured on a scale in which 1 equals “strong buy” and 5 equals “strong sell,” according to Zacks Investment Research. Also included is the number of analysts covering each company:
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Recent Market Analyst Number Ticker stock capitalization, consensus of Company symbol price in billions rating analysts Diamond Multimedia DIMD $4.00 $0.1 3.0 4 InfoSpace.com INSP $54.00 2.5 1.8 4 SilkNet SILK $24.81 0.4 NA NA Sun Microsystems SUNW $58.06 44.9 1.8 23 3Com COMS $26.38 9.2 2.2 33 VerticalNet VERT $95.94 1.6 1.7 3 Vignette VIGN $75.50 2.0 2.0 5 Wind River Systems WIND $14.63 0.6 1.8 4
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N/A: Not available
Sources: Bloomberg News, Zacks Investment Research
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Edward Silver, who writes the Investor’s Edge column in The Times’ technology-themed Monday Business section, can be reached at edward.silver@latimes.com.
