Another doomed love affair with e-commerce and IPOs
Andy Xie says 14 years after the dotcom boom and bust, the get-rich-quick mentality surrounding e-commerce IPOs has returned. But, once again, this love affair is doomed
Remember the young men in black turtleneck sweaters holding up IPO prospectuses for internet businesses - well, often just the plans - in 1999? They're back. Even some of the wording in the prospectuses is the same: "winner takes all"; "lots of people visit my website"; "eyeballs equal profits, eventually"; and, "you should pay up now for that future".
Financial markets tend to have seven-year cycles. It is unclear why seven, but there is evidence that love affairs tend to last that long, too. And bubbles are a lot like lovers; time eventually kills the passion.
It has taken twice as long for the internet bubble to come back. That's a bit like a really painful love affair; one that reaches great heights but crushes you hard on the way down. The Nasdaq surged to above 5,000 in March 2000 and then crashed to just over 1,000 a couple of years later. A love affair like that takes this long to heal.
After 14 years, we've forgotten the pain. We are ready for a steamy tryst again. Warren Buffett talks about the benefits of value investing; that's a bit like the dependable advice you get from your mother when it comes to relationships. But people want to buy what shoots up really high, really quickly. The guys in the black turtlenecks say they can do that for you.
Many ask what popped the bubble in 2000. Some speculate it was rising interest rates. Others say insiders were selling. I'd say, what about the fact these companies were not making money and never would? One day, speculators woke up from their drunken stupor and decided to sell.
Many argue that it's different this time. Many internet businesses that have been coming to the market make a profit. Their high growth rates justify their high prices. For example, online gaming is a major source of profit. When a firm has a successful game, it seeks an initial public offering and the market assumes it will produce more and more hit games. That is what growth-based pricing means. But you have to be really lucky to have a string of hits in the entertainment business.
E-commerce is all the rage in this cycle. Two propaganda lines are popular: physical shops charge more, and today's youth don't go to those shops, anyway. The first line has a point. China has a property bubble so high property prices, and high rents, mean higher selling prices.
Hence, some customers check out products in a shop and then order online. But that is just one bubble feeding by arbitraging another. When the property bubble bursts, the price difference will vanish. The internet bubble just brings forward the bursting of the property bubble.
Does online shopping have such a powerful attraction that today's youth don't want to go out to the shops, just for its own sake? I seriously doubt it. It's the low price that attracts them to e-commerce.
Venture capital firms, private equity firms and stock markets are feeding this sector with huge amounts of money. The goal is to build market share. Hence, subsidies are common. When a business subsidises its customers, its market share expands rapidly. Youngsters don't have much money; they respond quicker to subsidies.
Bidding for listing priority is a huge money-spinner in search engines and e-commerce. But this business is built on misleading consumers. When they search online for something, most do not realise that the results they see first are from sellers who have paid the most to the website operators. That's why fake goods are so prevalent online; they have the margins to pay to be at the top.
Just like 14 years ago, so much online advertising is from other dotcom companies. When the financial bubble behind the phenomenon bursts, the revenue vanishes as well.
Internet-based businesses are mostly trying to redistribute market share in established industries. First, this is not really increasing productivity. Lowering the selling price a bit won't power an economy sustainably. Second, as so many internet-based businesses target revenue first, we don't know whether the rapid growth of this sector is due to the cheap financing obtained or its sustainable cost advantage.
So many people in China are fascinated by the perception of quick and big success online. The symbol of success is an IPO and the associated big market capitalisation. While the internet can play a constructive role in the economy, what's going on is part of China's get-rich-quick bubble. The strategy for success is to first appear successful. When a crowd gathers around you, maybe you can sell them something, or better yet, sell to venture capital and private equity firms and, fingers crossed, eventually in the stock market.
As they say, a bubble is like sex: when it feels really good, it's almost over. For the bubble-surfers this time, there isn't much time left. In fact, it's IPO time or never.
