Mary Meeker is back. As a Managing Director at Morgan Stanley and leader of their global technology research team, Mary was one of the leading analysts of the companies emerging during the first wave of Internet commercialization. After the bust in 2000, Mary maintained an uncharacteristically low profile but she appears to be resurfacing.
She spoke this week at the Web 2.0 conference in San Francisco on the global mobile platform-driven Web – slides available here (hat tip to Peter Merholz). The bloggers in the audience seemed overwhelmed by the torrent of numbers but, hey, I like numbers. I did not get to hear the presentation, so I have to be careful about reading too much (or not enough) into the slides. Some numbers did stand out though:
- VoIP minutes in Denmark now exceed landline voice minutes
- The market cap of 5 leading Internet companies (Amazon, eBay, Google, Yahoo! And Yahoo! Japan) stood at $178B at the NASDAQ peak on 3/10/00 versus $261B now
- There are 1 billion Internet users in the world today but 2 billion mobile phone users – and Asia trumps North America in both categories with 36 % versus 23 % of users and 41% versus 11 % respectively
Mary also gives an interesting twist on the eBay-Skype merger that I blogged about earlier. She featured it as one of the best examples of a US-based technology company buying a leading non-US technology company with leadership in foreign markets with the intent of bringing the technology into the US market, suggesting this was just the beginning of a lot more of these kinds of transactions.
Even though Mary was featured as giving a global perspective on the Web at Web 2.0, you could tell that her heart was really in Asia, especially China and Korea. This is perhaps not surprising given the fact that Mary just came out with a major new report on “Creating Consumer Value in Digital China” (pdf of the report available for download), initiating coverage of the China Internet industry. It is a useful overview of some of the leading Internet segments (especially Mobile Value Added Services, Online Advertising, Online Gaming and Online Commerce) emerging in China. The tone is set by a quote from Meg Whitman, eBay’s CEO: “Whoever wins China will win the world.”
Once again, the numbers are interesting.
- China is now No.1 in the world in mobile subscribers and No.1 in Internet users under the age of 30 (there’s a much higher skew in Internet usage towards the younger generation in China – 70% of their Internet users are under 30 and 54% are under 24).
- The US still has more than twice as many users of the Internet, but China has twice as many mobile phone users as the US. At least half of China’s Internet users appear to be accessing it through their mobile phones.
Mary’s report appropriately focuses on the mobile phones as access devices and the corresponding growth potential of mobile content in China:
China, in many ways, is leading the development and monetization of mobile content (i.e. KongZhong, TOM Online) in ways that are still nascent in the US; we believe investors underappreciate the secular trend at work within mobile computing, and the value, both in terms of wealth and consumer satisfaction, that mobile value-added services can contribute.
US executives and investors, reflecting the PC centric infrastructure that prevails here, don’t yet understand the growing importance of mobility in reshaping how we connect together.
Despite the relatively early stage of development of the Internet industry, there are clear early leaders in each of the major Internet segments covered by the report. Even with these leadership positions and operating margins that typically are 30-40% better than their US counterparts, “China Internet companies are currently trading at 40-60% discounts to their global counterparts.” As the report points out, there are some good reasons for this, given the uncertainty as to how this very large but very early stage industry will evolve. While warning about the challenges facing foreign companies as they seek to carve out larger positions in the China market, the report also worries about the relative lack of innovation by Chinese companies which, to date, seem largely focused on copying successful business models emerging in the US, Korea and Japan.
Based on its assessment of market dynamics and company fundamentals, the Morgan Stanley report highlights three companies as the top investment picks:
- Ctrip – a dominant player in the online travel industry
- NetEase – a leading innovator in the online gaming market
- Tencent – growing off a strong base in the instant messaging market.
Mary’s reappearance and the general atmosphere at the Web 2.0 conference (not to mention some of the recent acquisition prices of early stage Internet companies) have prompted a lot of people to worry about whether we are entering another bubble (of course, they’re not really worried about the bubble, what they’re concerned about is a Bubble 2.0 - there's actually a blog by this name, with the slogan "Please, God, just one more bubble!" - to be followed by a Bust 2.0). For what it’s worth, Mary apparently suggested that we are experiencing a “boom-let.”
I’ve never been one to consult on stock tips or real estate investments (speaking of bubbles!), but I don’t have the sense that we are at a bubble yet in the Internet arena. The IPO market is still demanding and most of the new generation of Internet businesses have not had the benefit (or curse) of huge VC funding – they’ve had to bootstrap their way into existence and as a result are generally more firmly grounded than the bloated cash cows wandering around in the 1999-2000 window (with apologies to Boston Consulting Group, these cash cows consumed prodigious amounts of cash, rather than generating it, treating VC funding as a substitute for revenues).
The time to worry is when the VC’s line up to pour large amounts of money into businesses founded by untried venture teams who rely on soundbite business plans (“it’s like an eBay for the plastics industry”). One red flag came from a report from the Web 2.0 conference posted by Fred Wilson, a venture capitalist from New York, warning about the re-emergence of “second derivatives”:
I heard one business described as Google Maps meets delicious, and another described as Skype meets MySpace. When the first derivative hasn't fully figured its long term business model (other than getting bought), the second derivatives are pretty scary.
Here’s another red flag. In the last bubble, financial analysts, desperate for a way to value Internet businesses that had precious little revenue, much less operating profit, hit upon traffic numbers as a key basis of valuation. That gave rise to some very perverse business practices as Internet sites began to do whatever they could to boost their traffic numbers while ignoring anything that might be required to build a real sustainable business, like building enduring relationships with customers. Internet start-ups essentially became brief stops for venture capital money on its way to advertising firms designing marketing campaigns to draw the next wave of traffic.
As we move into Web 2.0, we see a similar struggle for quick and easy valuation metrics that might free the weary investor from understanding whether there is a sustainable business behind the numbers. One recent blog posting sought to assess the recent acquisition price for WebLogs, Inc. by AOL in terms of the number of links to WebLogs blogs from external sites. I sure hope that method of valuation doesn’t take hold. Like traffic, it offers some interesting information but, if it becomes a primary metric, it can lead to some very dysfunctional behavior.
We’re not quite into a full-fledged bubble yet, but I do worry about some of the early signs that the investment floodgates are opening up. In times like these, I guess it pays to be philosophical. Periods of great innovation are generally accompanied by boom and bust cycles – booms and busts help to accelerate learning. They can certainly be painful for individual entrepreneurs and investors, but the lessons will be valuable for everyone.
By the way, Henry Blodget is back, too. He was sighted at the Web 2.0 conference and has launched a blog – The Internet Outsider.