Net gain may be only for consumers

MASAYOSHI SON is a South Korean who lives in Japan. Some years ago, he decided that the Internet would be the future and raised $100m to invest in the World Wide Web. His company, Softbank Corporation of Japan, examined some 5,000 Internet companies, most of them from the US, and eventually invested in 100 of them. His choices, which include a big stake in Yahoo!, have made him seem like one of the most inspired investors of all time.

Today his $100m is worth in excess of $15bn and he is at the vanguard of the boom in Internet stocks. Most people think the phenomenon a bubble, which will inevitably burst and deflate. Mr Son believes we are only at the beginning - that the market capitalisation of the Internet sector will continue to rise exponentially over the years ahead as the World Wide Web works its transforming powers on business.

Whose judgement would you rather trust? Those who have utterly failed to forecast the significance of the Net, and now without a single Internet stock in their portfolio, condemn the phenomenon as a dangerous financial bubble, or those who like Mr Son saw it coming and backed their hunches? I'm not even going to attempt to answer this question, because whichever way I jump, I'm highly likely to be wrong. But there is no doubt that the Internet is raising some fascinating investment issues.

Just consider the following. An internet company called Buy.com in the US is planning shortly to tap the market for $60m through an initial public offering. The issue is almost bound to be hugely over subscribed, for Buy.com has a unique selling proposition. Its business plan envisages a negative margin on everything it sells over the Net - in other words it plans to sell products for less than it buys them for. The difference, it is envisaged, will be made up by advertising revenue. The more hits that Buy.com can generate, the more advertising it will attract and the more it can reduce its prices.

This is such a far out business proposition that it could only really be invented in America.

There is nothing new in the concept of loss leading, of course. The story is possibly apocryphal, but it was reported at the time of the great baked beans price war some years ago that one supermarket actually began to pay shoppers to come through the doors and relieve its shelves of baked beans. A similar form of loss leading is being used by the supermarkets in the present bread price war. On our own turf in the British newspaper industry, The Times has been selling below its costs of production for five years now, and jolly annoying it is too.

In all these cases, however, such loss leading, predatory pricing, call it what you will, is only possible because it is conducted by large organisations able to cross subsidise from more conventionally priced products. Buy.com is a business start up and no such subsidy is available. Even so, it might just work. Independent Television in Britain has operated profitably in precisely this manner for many years, paying for the cost of its programmes entirely from advertising revenues.

But just think about the implications of what Buy.com is proposing. It sells products at below cost, which in turn puts a general deflationary pressure on product prices. It hopes to make up the money by persuading the producers of those products to advertise. For conventional producers and distributors, this is plainly extremely bad news indeed. At every level, they lose out.

In such a game, even Internet distributors such as Amazon.com would struggle, because eventually Buy.com and others like it will find a way of selling books and CDs even more cheaply. Far from benefiting business, then, the internet may be destined profoundly to damage it. Certainly it is capable of tipping the scales of benefit very significantly away from business and towards the consumer. Logically we'll end up with a situation where the intensity of competition on the Net will mean nobody is capable of making a profit.

In reality, of course, that extreme of position will never be reached, if only because business has to make profit to survive. All the same, the idea that the World Wide Web presents businesses old and new with unparalleled opportunities may be a bit of a misconception.

Certainly there will be business success stories on the web. It can also safely be said that those businesses that don't fully embrace the net will fail. Furthermore, the web has the potential greatly to increase the volume and speed of trade. But in the end the web is more of a challenge to business than an opportunity.

This applies not just to established producer/distributors, but to the newer generation of wealth creators and internet entrepreneurs too. Electronic commerce has already achieved take off point in the US. In the process, quite a few traditional "on-land" retailers have now largely made the switch to "on-line".

For instance, at Charles Schwab, the discount stock broker, more than 70 per cent of trades are now conducted through the Net. Remarkably, this migration has allowed Schwab greatly to enhance customer service. It is now able to offer personal advise and content in a way never economically possible under the old model.

In Britain, the migration to electronic commerce is likely to be slower. This is not just because personal computer penetration is lower. The telephone costs of using the Net - free in the US, costly in the UK - are proving a big constraint on growth too. Even so, what is happening in the US will presumably eventually sweep the world.

Some forecasters believe that e commerce will quite quickly grow to be larger than the total size of all commerce as it stands today. If this seems a logical impossibility, it is only because the Net's potential for expanding the volume and speed of trade tends to be ignored. However, even the most conservative forecasts point to phenomenal growth.

Despite this, it is not yet clear where the web's money making capacity lies, if indeed it lies anywhere. For most businesses, the web is just another marketing and distribution channel, albeit a very low cost one.

Nobody has any doubt but that the web is going to transform the way they do business, but they also worry about how they are ever going to make any money out of it. It may well be that the only true business beneficiaries are the internet wholesalers and gate keepers, those able to offer a mechanism for searching the Web for the lowest possible prices.

Nobody can reasonably object to competition and transparency, but many businessmen are beginning to think there are limits. Unfortunately, the internet doesn't recognise them. Personally, I share the investment perspective of the Web put forward by Bill Gates of Microsoft.

I hope I do him no injustice by paraphrasing it in this manner. The net is plainly a wonderful thing which is revolutionising the way business is conducted, and for consumers it is a godsend which for the first time this millennium puts them firmly in the saddle in terms of choice and value. But don't assume there's gold to be had from mining these seams. Disney and Coca Cola are much more likely still to be big companies making good profits 25 years from now than Yahoo! or Amazon.com. And as for established consumer goods producers, the outlook is only for more and more competition and keener and keener pricing.