R = Richard K = Katie
R Now, Internet stocks. They were going through the roof earlier this year until they ran into their recent difficulties. So the question is: has the bubble finally burst? Our technology correspondent Katie Johnson joins me in the studio. So Katie, first of all, what drove these prices up so high in the first place?
K Well, all the hype about the Internet would have attracted some investors looking for a quick profit but I think the real driving force has been the fact that demand has far exceeded a limited supply. There were only a handful of Internet share offers last year, so opportunities to jump onto the Internet bandwagon have been very limited.
R And all this is despite the fact they're far from what you'd call a safe investment.
K Absolutely, yes.
R But what about good old profits? Do they match the performance of the share prices?
K Well, this is what's so fascinating. Take Amazon.com, for example, the Internet bookseller. They have a market value of $18bn, turnover in excess of $1bn, and yet they haven't even reached the break-even point. Apart from a couple of companies, such as Yahoo! And America Online, most of them are a long long way away from making any kind of profit whatsoever, never mind the huge profits everyone's hoping for.
R So why on earth is everyone so keen to invest in them?
K Well they're very trendy, and of course there's always the brand factor, which is another reason. Companies like Yahoo! And America Online now enjoy incredibly high brand awareness. But the real attraction is the tremendous potential for future revenue, particularly from advertising. Yahoo! Already has 144 million page hits a day and nearly 2,000 advertisers. And with Internet usage expected to double within five years, advertising spending is bound to increase.
R But then how do analysts value these companies?
K Well, it's not easy. They have few assets in the traditional sense and they all show phenomenal growth in terms of turnover, so analysts are having to rely on alternative yardsticks to compare them.
R Such as?
K Such as things like audience reach. Lycos, another search engine like Yahoo!, saw its shares jump by more than a third recently when figures came out saying it reached 45 per cent of all home Internet users.
R So, let's turn to the recent collapse in these share prices. Has the bubble finally burst?
K Well, we were due a sell-off, so it's not surprising that shareholders took advantage of the recent sharp rises. But I think what's really depressed prices is the flood of Internet companies that have floated recently and saturated the market with their hares. It seems that supply and demand are now leveling out. In fact, several companies have even seen their shares slide below the offer price. So, yes, enthusiasm does seem to be cooling.
R Well, it seems to me that anyone investing in Internet shares is in for a bit of a rollercoaster ride. So just why I the market so volatile?
K Well, it's a very young market, don't forget. And many companies have been listed for only a couple of months. Also, a lot of people who invest in these stocks actually use the Internet to trade on-line. Without the broker's commission, they can afford to buy in and out of stocks several times a day. This makes the market very sensitive to any breaking news. And I think it's this responsiveness which makes it so volatile.
R So, Katie, the big question. What's the market going to do next?
K Well, Richard, that's the million dollar question, isn't it? Some of the prices being paid do reflect the value of these companies so I can't really see prices falling much more. And although confidence will return, enthusiasm is cooling so don't expect to see prices soaring in the near future.
R So how do you see the future for companies in this sector?
K Well, I think the sector's going to see lots of consolidation activity as the bigger players look to buy talent and market share. Lycos, for example, has just acquired HotBot, one of its rivals. We'll also see one or two large established non-Internet companies looking to enter the market. The giant German publisher Bertelsmann, for example, has just entered into a joint venture with US bookseller Barnes and Noble to challenge Amazon's dominance on the Net. And if the Internet continues to grow like it is, then a few of these companies are bound to see substantial returns on their investments.