Taking stock


Trying to work out Internet share prices at the moment demands one of those wacky analogies beloved of science writers such as, "If all human history were squeezed on to one platform at King's Cross station, the dinosaurs would have become extinct somewhere near Manchester" (probably on a Virgin train). Or "If the whole of the stock market were a pizza the size of Trafalgar Square, Bill Gates would own all the cheese and eat all the anchovies". If these analogies lack a certain sanity, so do the prices we're talking about. Internet stocks have become the biggest casino game in history.

Amazon.com is a fine company. I buy lots of books there myself, along with occasional CDs; if I wanted to, I could even buy fancy penknives from its site as well. Last year, it made a loss of $27 million on a turnover of about $150 million, and it has never made a profit; none the less, it is valued at $16,778,630,000, give or take a few million, on the morning that I write this.

All it really owns is a bunch of very sophisticated computer systems and less than $10 million-worth of books. Compare it with Granada, a large, boring and profitable British company which owns an awful lot of things: 42 motorway service areas, 400 Little Chef restaurants, 162 motels and more than 250 proper hotels. Its profits have been whizzing up for the last few years and in fact its stock price has nearly doubled, to the point where the company is worth, on the London stock market, £8,707,200,000 - yet even after converting from pounds to dollars, this is billions less than Amazon.com.

Amazon is perhaps the most extreme case of a share whose value is almost completely unrelated to the underlying business. The shares trade furiously, with tremendous price swings. In December and January, it shot up from around $100 to twice that, and then back down again. On the day I write this, the share price has fluctuated from $110 to $90 and then most of the way back up.

Unless the investors of America are trembling at the news that the New Statesman is about to expose them, there is no good reason for any of this except gambling frenzy. The web-based trading services let anyone with a few thousand dollars to play with join in the market directly and gamble all day. This has produced a new breed of "day traders" whose idea of a long-term holding is 48 hours. A company like Amazon, which has never made a profit, and may indeed never do so, is almost entirely traded by gamblers who rely on fast-moving share prices for their profit - never mind which direction they're travelling. But there are elements of this in the behaviour of every Internet stock, even the ones which are based on real, profitable businesses. Many of the astonishing prices paid in Internet takeovers are payable only in the equally overvalued paper of the predator company.

So why are the world's investors placing such a huge premium on thin air? One answer might be advertising. The theory of the Internet economy is that the really valuable sites are those to which everyone flocks. That's where advertising can be sold. That is the basis for the huge valuations of "portal" sites such as Netscape's Netcenter ($4.2 billion to AOL) or Excite ($6.7 billion to @Home, which sells Internet access over TV cables). These "portals" started off as search engines, but now are being marketed as the natural home page for all the millions of people piling on to the web every month. But there is a huge difference between a portal and a search engine. Anyone who wants to get work done on the web needs a search engine. No one needs a "portal" unless they are trying to find a slow and unreliable substitute for television. Real television companies like Granada (again) charge far more for their advertising than even the most profitable websites can.

In the long term, there's no doubt that the web will change the world. But there's no guarantee that the companies which finally profit from this will be those trading today. Wired magazine invented the ad-supported model of the Internet site in 1992, when it was the hippest thing in the universe. Two years later, the company's still excellent site was not even among the 100 most visited on the net. The sanest people in the market today are probably the purest gamblers, for whom long-term means 24 hours.