Internet: The Good, the Bad, and the Ugly

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Internet The Good, the Bad, and the Ugly
Matei Mihalca, Vice President Head of
Asia-Pacific Internet Research Merrill Lynch
Co. E-mail matei_mihalca_at_hk.ml.com Tel
2536-3967 (office) 9863-1901 (mobile)
2869-5739 (home)
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Napster The Distributed Economy?
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The World as a Library...
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The Internet Whats Happening?

• NASDAQ correction Webs true promise finally
  fulfilled
• Coincidence? Maybe not!
• What promise? Internet as one giant distributed
  database (Napster/Freenet/Gnutella broadband)
• Everything, everywhere, anonymously - and free!
• Three examples
• True ubiquity WAP
• Low entry barriers The cargo guys
• Historic change Unbundling of stuff
• Clearly, someone, somewhere gets hurt
• Differentiating between social and business
  implications, macro- and micro-economic
  implications

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The Challenge of the Internet Economy

• How to create and - more importantly - sustain
  value

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What to Do?

• Economy may react like an organism, in
  self-defense
• Search costs reduced by the Internet may come
  back
• Creating closed-communities, Internet
  balkanization
• A vision of a layered, segregated Internet
  (content/commerce, infrastructure, class)
• How to build enclosures?
• Buddy lists, vanity e-mail, creating the
  untransferrable
• Technology Firewalls, stopping bots
• Bundling the unbundled timber.com

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Our Internet Philosophy Conclusions

• Social and economic drivers are at odds
• Future of the Internet economy yet to be
  determined
• Benefits of a distributed economy (open source)
• versus...
• A layered, enclosed Internet
• The Cathedral and the Bazaar as opposed modes of
  economic organization
• The truth is out there... Oops, somewhere in
  between

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And now for some other stuff...
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The Correction Now What?

• Questionable models questioned
• VC over-generosity
• Emerging flight to quality
• B2C, B2B, B2... Companies, not sectors
• We expect the market will be selective
• Companies with track records should survive
• We also expect more local listings

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First Generation Models
Portal

• Yahoo!
• America Online
• Amazon.com

ISP
B2C
Big bets, big ideas High risk, high
reward Marketing-driven
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Second Generation Models
Verticals

• Portals, portals everywhere
• Outsourcing trend
• Especially in Asia

ISP, ASP
B2B
Focused, niche propositions Less operational
leverage Technology and industry knowledge driven
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Key Trends Behind the Transition
The corporation becomes thin...
Focus on core competencies
Cost but also empowerment
ASP its challenges (commoditization, culture)
...And economic activity is diffused
Rise of a new class
SOHO, moonlighters, freelancers
Web users as economic agents
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Incumbents vs. Newcomers in Asia
Incumbents might be better positioned

• Time delay Have learned from US experience
• Incumbents have scale in fragmented Asian markets
• "Fragmented" because population, language, etc.
• "Fragmented" because young Internet markets
• It's a clicks-and-mortar world
• Searching for scale vertically or horizontally

We believe the next Internet wave centers around
incumbents
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In Search of Scale "iBusinessCorporation.com"

• iBC Hutch CK HSBC Hang Seng
• Mouthful denotes search for horizontal scale...
• ...In a limited market

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Changing Investor Attitudes

• No more "Web sites" businesses!
• From the center to the edges (The Cisco Syndrome)
• Infrastructure, enablement
• Bouquet of holdings to minimize risk incubation

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Conclusion How to Look at Internet Companies
and/or Investments?
Valuation

• Look for relative value

Market opportunity
China, India, Korea
Business model
Does it make sense?
Community
What no-one can take away
Management
Would you have them over for dinner?
Danger of fraud
Who's on the board?