IS Survival Guide: The True Future of 'Net Stocks

"The only function of economic forecasting is to make astrology look respectable."

-- John Kenneth Galbraith

RUBBING SALT into wounds is about as much fun as a columnist can have.

It's the new year: time to review old predictions and make new ones. Before I critique myself, I can't resist a friendly jab at my colleague Bob Metcalfe, who stuck his neck way out last year to predict that the dot-com bubble would burst Nov. 8, 1999.

It didn't, of course. Bob made the same mistake he always makes: He made a specific, testable prediction. That means we got to find out if he was right or wrong. He was wrong.

Bob was wrong on two fronts, really. First, he got the date wrong. That's minor. His bigger mistake: predicting that the falling-out-of-fashion of dot-com companies would be an event -- a bursting bubble.

But he was right on the important issue. Although venture capitalists still like dot-com investments, skeptics are becoming more vocal. An increasing number of skeptics figure that dot-coms are the real-world equivalent of the company satired in Garry Trudeau's Doonesbury, whose only product is its stock.

However, Trudeau got it wrong, as well. What's really going on is that the whole initial public offering (IPO) phenomenon has become a new avenue for publishing fiction.

Here's how it works: Imagine you think up an interesting premise but can't figure out a way to attach a plot to it. Here's an example: the draft prospectus for an actual dot-com retailer that sells product at negative margins, planning to make up the difference in banner advertising revenue.

Because banner advertising is a dead medium, the authors of this prospectus must know it's fiction. That doesn't matter, however, because nobody in an IPO makes money on company profits. The entrepreneur and the venture capitalists -- the publishers -- get their shares cheap, planning to sell them at a profit to first-round buyers when the company goes public.

These first-round buyers don't care if the company ever makes money, either.

They're in and out quickly -- like bookstores, keeping inventory to a minimum.

They create publicity and high margins, then sell to second-round investors.

These second-round investors play the role of book purchasers. I hope they enjoy reading the prospectus. In most cases, that's all the value they'll ever see.

This sham won't collapse catastrophically, because the excess of investment capital won't cease to exist all at once. Starting sometime this year, however, dot-com IPOs will become chaotic.

Dot-com fiction will suffer the same fate as overworked plots in the book trade: In books, as in television and movies, sequels and spin-offs eventually wear out a genre. Gimmicks and hybrids come next.

Gimmick books, such as The Duct Tape Book, can make a lot of money. Gimmick dot-com companies will attract a lot of venture capital for the same reason -- their novelty alone will carry them through an IPO.

Hybrids succeed by providing publishers with a sense of safety. Buffy the Vampire Slayer is a hybrid: Teen angst meets horror. You'll see a lot of tracking stocks for "clicks-and-mortar" companies -- one business version of a hybrid plot-line. A tracking stock, if you're not familiar with the term, is a separate stock issued by an existing company for a single line of business. It "creates shareholder value" without the company having to do anything new and useful -- it's a different way to try to get your stock overvalued by Wall Street.

Understand, I like the clicks-and-mortar concept. (For that matter, I enjoy Buffy.) Some clicks-and-mortar implementations will be nonfiction and highly successful, because real businesspeople will run them for actual profits.

Tracking stocks, like any other activity that distracts company leaders from running their businesses, strike me as a bad idea. You'll see a lot of them this year.

Meanwhile new Internet authors/entrepreneurs will publish increasingly bizarre fiction in a desperate attempt to prop up the genre, but to no avail. As real investors lose interest, venture capital will gradually dry up.

The Internet bubble won't burst. Wrong metaphor. This year, the wind will go out of its sales ... uh, sails.

Invest much? Send e-mail to Bob_Lewis@compuserve.com, or join his forum at www.infoworld.com. Bob Lewis is a Minneapolis-based consultant with Perot Systems.

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