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Less than a year ago, it would have been hard to imagine that Google would be trudging along, eking out bottom line growth primarily by cutting expenses. And it would have been hard for some to believe that the hottest startups would seemingly be no closer to solving their monetization questions.
The reality: the internet economy is a lot like the rest of the global economy.
Does that mean that the internet is no better an investment than anything else? In a piece in the Wall Street Journal, fund manager James Altucher goes further than that: he argues that the internet is dead as an investment. His reasoning:
The days of infinite margins, 1,000% productivity gains, and growth of market throughout the universe are long over. Internet companies now should be treated, at best, like utility companies that get bought at about 10 times earnings and sold at 13 times earnings. Even then, I'm not sure I would give the Internet sector the same respect as the monopoly-protected utility sector.
He goes on to point out that established internet players like AOL and News Corp. are struggling to redefine their business models. 800-lb. gorillas like Google are trying to find the new ones that can promote slowing growth. And upstarts like Facebook and Twitter are trying to find viable business models period. Even in infrastructure, Altucher is cynical; as an example he states, "Cisco at 15 times earnings, trades in line with the S&P 500. Buy them when they start giving a steady dividend".
Altucher concludes with a simple thought: as wonderful as the internet is, as an investment there are better opportunities elsewhere, particularly with "the companies that are rebuilding the country along with the economy".
Fred Wilson, a partner at VC firm Union Square Ventures, disagrees with Altucher. In a rebuttal, he writes:
We (my partners and I at Union Square Ventures) think the Internet is one of those transformative technologies that changes everything. We see it like the industrial revolution or the invention of the printing press. It is a huge game changer. The Internet has been a commercial technology for about fifteen years now. And we are beginning to see the impact of it on everything around us. The industrial revolution and the Renaissance before it lasted a century or more.
When it comes to AOL, he argues that AOL was never a pure-play internet business. With Google, he argues that it will easily turn on a cash spigot with all of its apps. Facebook, he notes, is going to pull in over $500m in revenue this year.
Wilson goes on:
And what about Amazon, eBay, and Craigslist? And international businesses like Baidu, Lastminute, Vente-Privee, Tencent, and Sohu? There are easily a dozen and probably two dozen worldwide Internet businesses that investors should own today and for the long haul.
Who is right? Has the internet become a boring investment as Altucher argues or is Wilson right that the internet is alive and well? I think they're both right and wrong.
Altucher makes some valid points. Most importantly, he reminds us that the internet doesn't exist in a vacuum. There are other opportunities out there and some of them are substantially greater than what the internet can provide. I think most investors are aware of this.
At the same time, Wilson is right to point out that there are plenty of internet companies that aren't slouches. While that doesn't necessarily make them the most compelling investments available today, that doesn't mean they should be avoided altogether.
Obviously, there are many different types of investors. As an asset manager, Altucher has to take a broader perspective than Wilson, whose VC firm is tasked with investing in technology-related startups. Both men strive to deliver returns for their investors with different investment approaches and through different asset classes.
If there's one key take away from the debate and discussion, however, it's this: for VCs like Wilson to eventually make big money, they have to fund startups that interest guys like Altucher. And even though the IPO market is pretty brutal right now, I think it's hard to deny that the latest crop of heavily-funded internet startups is tough to get excited about. Which is what Altucher is basically saying.
But there's a caveat to this discussion: you can't discuss the internet as an investment and neglect the fact that investments aren't limited to financial instruments like stock. The internet is bigger than guys sitting in plush offices on Wall Street, Sand Hill Road and the like.
While it's debatable as to whether the attention lavished upon startups like Facebook and Twitter is healthy for the internet economy, there is no doubt that the internet proves time and time again to be a good investment for entrepreneurs and businesses -- from the entrepreneur who builds a profitable small business online to the small business owner who uses the internet to expand into new markets and reach new customers to the multinational corporation that uses the internet to streamline its supply chain.
Thanks to its democratic characteristics, relatively low barriers to entry, global nature and ever-growing maturity, the internet is one of the best investments out there today for many people and companies, even if it's not knocking out billion-dollar IPOs for guys like Altucher and Wilson. In economic terms, those IPOs represent but a small fraction of the return on internet-related investments.
Photo credit: futureshape via Flickr.