<nettime> Crazy way to count : the topsy-turvy logic used to value the

[John Armitage <john.armitage@unn.ac.uk>]

new internet companies
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[Cyber Society - http://www.unn.ac.uk/cybersociety]

Crazy way to count 

Victor Keegan on the topsy-turvy logic used to value the new internet
companies

Thursday February 17, 2000
The Guardian

I've learned something about myself as a result of Vodafone's record $183
billion takeover of Mannesman - and so have you. According to Business
Week, Vodafone spent a "startling" $12,400 to gain each new subscriber. 
So, it appears, we are all "worth" that amount each to a mobile phone
operator.

Why didn't someone tell us before? If we had known that mobile phone users
were valued so highly, we could have all got together and offered our
mobile souls to Vodafone for a cut-price $10,000 each.

The practice of assessing a company's worth by dividing its market
capitalisation on the stock market (ie the value of all its shares) by its
customer base is rapidly becoming the standard way for city analysts to
rate internet companies. There isn't much choice. The standard way of
comparing the value of a share with the earnings it produces is redundant
because hardly any net companies make money.

The current issue of Fortune, the other US business magazine, gives a list
of internet companies based on market capitalisation per pair of eyeballs. 
This is an even more tenuous rating than one based on actual customers
because eyeballs can become distracted and wander off, whereas mobile
phone customers have at least paid for their phones and have often signed
a contract, too.

Fortune found that the $7.4bn market capitalisation enjoyed by the web
portal Lycos valued each customer at $244 dollars, while online
stockbroker Charles Schwab boasted a $30bn market cap - putting a
valuation of $4,562 on each pair of eyeballs.

And so it goes on.. AOL customers are worth $5,781 apiece, those of Amazon,
the online bookstore, $1,400 and those of Yahoo!, the most popular web
gateway, $2,038.

If you only subscribed to the top ten sites examined you would find
yourself with a personal market capitalisation of more than $35,000
dollars. Perhaps we should all float ourselves on the stock market - or
gather together in user cooperatives pledging to buy from certain
specified sites. This would cut out yet another middle person - and remove
the need of online traders to buy other companies to get our custom.

This illustrates the mess that online valuations have got into. The entire
exercise is ex post. It doesn't look at what should happen: that is what a
sensible way of valuing internet stocks might look like. Instead it looks
back at what has happened (ludicrous over-valuations) and tries to use
this as a justification for current valuations. It doesn't seem to matter
that most ordinary investors buying internet stocks haven't a clue how
many eyeballs they may be buying.

Amazon remains the most fascinating company. It has done brilliantly in
establishing itself as the world's biggest bookseller. Its UK operation
turns over #100 million a year. Sales in the last quarter of 1999 were
430% above a year earlier. But its overall losses are escalating, although
it now claims to be making money on book sales while making losses in
other areas.

Analysts claim it has first-mover advantage because of the speed with
which it has established a global brand. Time may prove that it has
first-mover disadvantage. Unless it re-invents itself (which is possible),
it is vulnerable. It exists because of the slowness of its real
competitors to seize their advantage. However much Amazon buys in bulk
there is one firm it can never undercut: the publisher. No publisher will
sell books to Amazon below cost. It is only the failure of publishers to
realise their potential that keeps Amazon in business.

As more potential customers go online, publishers could put their lists on
websites then sell directly from their warehouses or printing works. For
people who know what they want to buy before they log on to Amazon, this
is the obvious solution. And promiscuous purchasers can surf through
Amazon's site, read the reviews, then buy more cheaply from the publisher. 
Or dispatch an intelligent agent around the web to seek out a lower price. 

Even this may prove to be an interim solution - at least as far as
paperbacks are concerned. In Helsinki there is an internet cafe where you
can order a book, have a coffee, then collect it as you pay your bill. It
has been downloaded from the internet, printed and bound in the room next
door while you have been drinking. At the moment it is confined to out of
print books and classics, but there is no reason why any paperback
couldn't be distributed like this, removing the need for warehouses,
printing works and all the intermediaries.

And, of course, we will soon be able to buy electronic books, enabling us
to download whatever literature we want from the internet on to a
user-friendly device and read it wherever we are. Everyone agrees that at
the moment you would have to be crazy to ready an entire book online. But
that refers to the personal computer model. If you have something with you
that looks like a book, with book-like print on it, you won't necessarily
worry that it is electronic. If it comes to this I wonder who will be more
likely to be delivering books to us - Amazon or Vodafone? 


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