Ecommerce's Monthly Talking Point: February 1999 Blowing Bubbles Is the practice of calling all Internet business overvalued, overvalued? Hardly an Internet-second goes by without another voice adding to the chorus of disbelief in the buoyant values of Internet company stocks. And the explanation for the impressive market caps of the Internet set is usually given as the equally impressive projections for 'electronic commerce' - whatever that might be. It's as though in order to explain a speculative bubble, commentators point to an allied phenomenon which seems to them much more rationally based, and worthy to act as a justifying underlier for the frenzy. But this seems misguided to me. The high valuations given Internet stocks are explicable, but not by scientific reference to the potential of ecommerce. Ecommerce isn't a trusty physical quantity that can be hammered into a set of recognisable - and measurable - markets. Possibly people buy Internet stocks because they believe that an explosion in net-mediated commerce will generate revenues justifying the entry price. It's also possible that many believe that by stoking the prophecy through their stock purchases, they'll actually help to bring the healthy primetime of ecommerce to market. For these kinds of buyers, investing in the Internet sector is akin to performing a rain dance. These might be two plausible post-purchase rationalisations, but I don't think they account for the initial impulse to buy. That's solely down to fashion. The big companies that produce the raw stuff that people need to make refined stuff are all being squeezed into shrinkage and merger by floored commodity prices. Internet stocks represent the polar opposite of the heavy industries: lighter than air, they are ultra-service companies, offering unneeded services to customers who won't pay for them. Buying a stake in one is an expression of the investor's millennial urges, not his economic analysis. The idea that electronic commerce is suddenly going to generate all the wealth to match the book value of the Internet sector is an item of faith for many. But it seems to be based on the intellectual obviousness of the proposition, not its probability in the fragile real world of consumer habit, interconnected markets, product differentiation and complexity... It also seems to discount the fact that ecommerce - at least on the scale necessary for the justification of its stock market foreshadowing - can't reach a dominant volume without destroying traditional commerce. Those touting ecommerce as the economic deus ex machina of the next leap forward manage to see its effect as a massively additive or a multiplying one. Yet there's a subtractive - and a divisive - element to the equation too. Ecommerce certainly means that lots of businesses will go out of businesses. Others will arise, and some of them may be the high-price stocks of today. Do today's investors really believe that Internet ventures, underwritten by a massive consumer migration to online transactions, will siphon all the value out of every other sector? If so, why aren't people disinvesting from high street retailers and ploughing the cash into delivery companies?

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© 1999 Paul May