Stockbrokers seek a Net profit

By Douglas Rushkoff. Published in The New York Times Syndicate/Guardian of London on 21 January 1999

“What’s with this Internet?” an old friend called to ask me late one night last week. “I mean I know it’s a big deal and all,” she admitted, “but this is crazy!”

By “this,” she meant the recent spate of new Internet stock offerings, where securities issued in the morning at nine or 10 dollars per share are worth 10 times more by the end of the day.

As a result, these tiny companies, with fewer than a couple of hundred employees, with no real assets to speak of, and no earnings whatsoever, end up achieving “market caps” (the total value of all their stock) equivalent to that of major airlines and defence contractors - companies that employ thousands, earn billions, and own planes, boats, factories, and real estate.

“How can this be?” my puzzled friend asked. She already understood that the prices of stocks are based on speculation more than valuation.

She knew that the sky-high share prices of companies like and The are based not on their current earnings (or losses) but on what people think these companies might earn at some point in the future. She knew that investors believe that the Internet and online marketing are going to be “the next big thing.”

What she didn’t know, however, is that the frenzy with which the financial community is investing in Internet issues is based less on earnings projections than it is on the needs of the stock market itself. The Internet is the “next big thing” not because it will actually be such a big thing, but because the markets need a big thing, any big thing, to keep themselves and the economy growing.

Consider, for a moment, if these Internet speculators are correct, and companies that conduct Internet shopping transactions will be making billions of dollars per year in the near future. Well then, if all this shopping is online what happens to the department store, the “superstore”, the mall, or downtown itself, for that matter?

Shouldn’t the emergence of an Internet shopping universe also require the demise - or at least a major contraction - of the physical shopping universe? And then, of course, a corresponding collapse of the oil industry (no need to drive to the store) the banking industry (or at least the physical banks where we get our cash), and the commercial real estate market?

And who is going to bring all this stuff to us? Won’t this be a boom for the United Parcel Service, Airborne, and Federal Express? And, along the same lines, wouldn’t this also be a great time to invest in chiropractic services, orthopedics, and other treatments for the ailing backs of all the delivery people?

If investment bankers were earnest in their 21st Century earnings estimates for Internet companies, then they would also be calculating the impact of this consumption revolution on other industries and society at large. I suspect they are ignoring these effects not out of ignorance, but because they don’t really believe that Internet future they are promoting will actually arrive.

It’s as easy, perhaps easier, to make money by predicting and provoking stock market gyrations than by accurately forecasting real shifts in the economic engine. When market valuations get into the stratosphere, it doesn’t take a Goldman or a Sachs to understand that share prices have more to do with psychology than with fundamentals.

As history instructs, an economy can keep growing only for a century or two before the resources fuelling its expansion reach their limit. Then, only a major technological innovation - like the steam engine in the industrial age - can boost production and consumption to the levels required to continue the growth in prosperity.

The Internet is certainly a leap forward in technology, but it doesn’t really increase productivity in the same way that mechanical devices did in centuries past. It simply replaces the means by which the same resources and products are distributed.

While buying our goods online from distant warehouses may spur consumption by eliminating the added cost of retail showrooms and shuffling inventories, the only new things produced will be the computers and networks themselves.

Will life be better this way? Do we want to buy everything we need online? No one’s even asking those sorts of questions, because they have nothing to do with the real reason this vision of an Internet future is dominating the investment bankers’ latest tip sheets.

To brokerage firms, the Internet and the companies figuring out how to make it work are no more than an excuse to spur the Nasdaq average to new heights, and the best evidence of how an economy that is out of steam will find yet another “big thing” to keep the engine running.