Friday, October 21, 2005

POP! went the Internet

A reprint from a Yahoo mailing list, originally posted in 2001:

Sometime in 2001 there was an article in... I think it may have been Yahoo Internet Life, but I'm not sure... profiling Jerry Yang, cofounder of Yahoo. One point that was made in the article was that Yang and his partner in Yahoo, David Filo, are more or less prisoners of their own success.

*On paper,* they are both multibillionaires. But they really can't touch too much of their supposed wealth for fear of toppling the house of cards that is Yahoo.

Yang mentioned that he'd love to unload a few million shares of Yahoo and take advantage of the apparent goodwill that so many people have in his company. But, just to show how lopsided the thinking of stock investors is, if he does unload some shares, instead of thinking, "OK, the man wants a piece of the pie, and why not? It *is* his pie," the effect would be just the opposite. "Did you hear? Yang just sold. Yahoo is tanking... sell!" Then the stock takes a dive.

Why am I writing about this? Well, I don't know about Jerry Yang, but I'd have trouble eating stock certificates. I don't know how to make clothing out of them, I can't run my car on them, I can't pay my rent with them (though in Sillycon Valley and Sillycon Alley things might be different), I can't make a house out of them (though I suppose I could wallpaper an apartment with them if I was pushed)... all those things takes money, directly or indirectly, and he has a potential source of BILLIONS of dollars that he can't touch for fear of devaluing the whole thing. Crazy, isn't it?

But this whole Internet thing was crazy to begin with...

I don't mean the technology, or its usefulness, but the idea that ANYTHING can be the basis of a successful business and create a cash cow for the business owner. Not that the Internet is impossible to make money with, just the opposite. It's just that all these wannabe millionaires were counting on stock prices to fatten their pockets, and forgetting all about whatever it is their businesses were supposed to be doing.

Trying to finance a business by worrying only about the price of the stock, rather than making widgets or doohickeys or whatchamacallits, is this: Say I have a box. I concede right up front that the box is empty. But the box COULD wind up having all kinds of strange and wonderful things in it that could make millionaires out of anyone foolish... oops, I meant visionary enough to invest in shares of ownership of that empty box.

So, investors are lining up, begging me to take their money in exchange for part ownership of the empty box. What do I do with the money? Smart thing would be to find some doohickeys to fill the box with, right? Well, say instead, I spend all that money on a fancy office, a big house, expensive car, the best designer clothes, and a splashy advertising campaign (complete with banner ads on Yahoo, of course) touting the *existence* of my empty box. Not the objects the box will contain, or the service the box may offer, just that the box exists.

If you were one of those investors in the empty box, wouldn't you want to see something in return for your investment *sometime*? Other than a TV commercial for the empty box every five minutes, or print ads in magazines every other page, wouldn't you like to know that I'm selling or making doohickeys or whatchamacallits or gizmos better than (or more cheaply than, or more exclusive than, or more *something* than) the competition?

So would millions of other investors. THAT's why the so-called Internet bubble burst. And this was never a big secret. Anybody see the movie "Wall Street"? When the young stockbroker loses his shirt trying to be just like Gordon Gekko, the broker's father lectures him that he forgot that his company was supposed to be *doing* something with the money stockholders were *lending* the company. Yes, *lending.*

A stock purchase is nothing more or less than a loan based on the premise that the borrower (the company) will use that loan to make more money. When *all* of the money is instead used to entice more people to invest, you're stealing from Peter to pay Paul.

Like Forrest Gump says, "And that's all I have to say about that."

Since then things have changed, but not enough. There's still too much emphasis on stock price rather than how much money a company is making or will continue to make.

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