A sceptical view of the web

Paul Kedrosky acts as a consultant to venture capitalists and companies braving the choppy waves of the internet economy. He is an assistant professor of commerce and information technology at the University of British Columbia, and a frequent contributor to The Industry Standard and The Wall Street Journal. He was previously a technology equity analyst for HSBC Securities.

How revolutionary has the internet really been on business?
Well, it is demonstrably changing business, but the question is how radical the change is. And since we are living through this, we are not the best ones to testify. Putting it in historical perspective, it is up in the top five of revolutionary things, but it's definitely behind electrification and the assembly line in terms of a real impact on business.

But surely internet companies have had a dramatic impact on the financial markets? You used to be an equity analyst - what's your take on this?
The market's a manic depressive. It's never happy sitting in the middle because it's just no fun there. It's gone through its manic stage and is now in the late stages of a depression, in terms of internet companies.

People believed there was going to be new species of company - the dotcom - that was going to be a totally different kind of company, and the market has got depressed about the prospects for that. The market has, however, come to realise that it was wrong to throw the baby out with the water. Some companies with internet-based business models, like Siebel and BEA, are going to make astounding amounts of money, and the market has swung back to looking favourably on them.

So you're making a distinction between internet companies and hi-tech companies?
It's not quite that. There are companies whose businesses are premised entirely on the internet, and they'll be fine, and others won't. It's just that in the manic stage of the market, people didn't really care to draw distinctions. As long as you recognised the internet existed, you'd get a hearing.

That's the way the market always works: it gets excited about things, grabs them all up, and kicks them to the moon. Unfortunately, many people don't understand that and believe that the market is actually telling them something when it goes wild. It isn't, it's just saying: 'I'm the market and I'm really excited!'

What do you make of the fashion for looking to revenue growth and market share rather than to good old-fashioned profit?
It's outrageously dangerous. I have two perspectives on this now, both as a board member of various companies and as an analyst. What gets measured is what gets done, and if you give management an incentive to do something like concoct revenues, they'll do it. You can sell yourself right into bankruptcy by, say, issuing warrants.

And so it is wildly naive that folks are focused on the revenue numbers. It's as dangerous as the early dotcom fixation on eyeballs. All of these so-called metrics just duck the real issue: that you have to sell stuff for more than it costs.

How do you think the way that fund managers and investment analysts evaluate internet and technology stocks is going to change over the next six to twelve months?
We're going to go back to traditional metrics. Fund managers, in particular, are there now. They are just not interested in concept stories and profit-ducking explanations that carried water until March of this year. So it's back to price capitalisation, price-earnings ratios and so on. As for companies that show no hope of even reaching a reasonable level of profitability, they will get their asses kicked.

What's your angle on the rhetoricians of the New Economy - the Business 2.0s and the Red Herrings?
I find a combination in them of the naive and the cynical, which is an entertaining combination. On the one hand you have this adolescent 'gee whizz!' banter about supposedly revolutionary technology, and on the other, you have secret cynicism. And so you have even the most arcane little changes - say in enterprise application integration - dressed up as world changing events when we all know we're just putting in fan-belts here.

It's bizarre that any change in technology seems to acquire Messianic overtones. Here in North America especially, technology gets elevated to a pagan religion, and it almost becomes a kind of heresy to express doubt about its effects. The reality is that big epic changes are, well, big and epic. They don't come along too often.

What's your opinion of the Napster phenomenon?
It's amazing how you get these 'true believers' who don't seem to care at all about the consequences for the music industry of sharing music. I'm vehemently against the passing off of this activity as blithely as many are doing, and I favour better digital rights management applications, and a few show trials. It's an immoral activity, cool though it may be. It's just all part and parcel of this amoral idea that technology is a force larger than anything else, and we have to worship it.

What would you advise e-strategists to pay close attention to at the moment?
In general, I'd say plug your ears and treat technology as a tool, run and hide from anyone who tries to shock you into changing your business, and be as quantitative as you can.

Is there any internet economy punditry that you think is valuable?
Well, there is a lot that isn't in the new economy magazines and the internet research outfits. I call all that the 'biz porn' industry because of the characteristic combination of cynicism and naivety. By contrast with the Forresters of this world [analysts Forrester Research], I like brokerage analysts. At least with those guys, you can prove them right or wrong and you can do it on the spot. I like Bill Fleckenstein, who writes for Silicon Investor, very much. Everyone else is just playing a cheap fortune-teller game.

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