************************************************************** * * * CYBERSPACE * * A biweekly column on net culture appearing * * in the Toronto Sunday Sun * * * * Copyright 1999 Karl Mamer * * Free for online distribution * * All Rights Reserved * * Direct comments and questions to: * * * * * ************************************************************** Profit? It's the software, stupid It seems incredible but AOL bought Time-Warner at the beginning of the year. Think about it. A few short years ago AOL was a crappy bulletin board system with a few hundred thousand men all asking each other "are you a cute girl?" Today it controls everything from CNN to a catalog of photographs that define generations and stopped wars. On paper, AOL was worth several billion dollars more than Time- Warner. Think about this a second. Time-Warner owns TV cameras, movie studios, printing presses, and some trucks. AOL owns a room full of modems. Something doesn't seem right about that. Why would ostensibly smart, and wealthy, investors put their money in a company that essentially amounts to nothing more than a method for millions of men to ask each other "are you a cute girl?" It took me a while to think this one through but I eventually realized it made perfect sense. It all came to me in a downtown night club. Over some loud music, I was talking with a guy, a lucky guy, who bought about $80,000 worth of stock in a friend's software company. Like so many small, clever Canadian software companies, it got bought out by a big American dot.com. The dot.com did a crazy thing after buying the little Canadian company. It sort of cornered the market on the emerging world of beaming sports scores and other nonsense into cell phones. This is going to be big. And it got there before Microsoft. In fact, it sort of shut out Microsoft. His $80,000 worth of stock is now worth $5 million. Five million American dollars. Anyway, he sort of had the nerve to claim dot.com companies needed to start showing a profit. One can only see a company's share price double every three months before you decide enough is enough and you demand a 2 cent per share dividend. A man who just saw $80,000 magically turned into $5 million was silly enough to quibble about a crazy little thing like profit. Boeing sold $58 billion worth of planes, made a profit of $2 billion dollars, and has a market cap of about $40 billion. By contrast Amazon.com is worth half as much as Boeing but had sales of about a billion dollar and lost nearly half a billion dollars. It's a typical story for dot.coms. There are dozens of dot.coms with small or non-existent profits but have market caps that match or exceed "real" companies that make real stuff you can pick up and drop and break. In the world of the Internet and software, it's no longer about profit. It's about control. If Amazon.com puts traditional book sellers out of business, controlling Amazon.com controls the books people read. If you control AOL or Yahoo, you control what people access on the net. If you control Microsoft, you have a presence in every work place and home. How much would you pay to control what people read, what food they eat, what movies they rent, who they date, what music they listen to? Playing god is surely worth more than a 4% return on your money. Companies that make the real stuff, like consumer electronics, have never forgotten the lessons learned by Sony and its Betamax VCR system. Remember Beta? Beta was, in every way, superior to VHS. The tapes were smaller and the picture quality was better. But Sony lost out to the VHS format because movie studios were reticent to support two VCR formats and went with VHS. Sony discovered in the early '80s what Apple learned in the early '90s. It's the software stupid. People don't want the best. They want what they can use. Sony soon went about acquiring movie studios and music labels to ensure whatever future technology it wanted to deliver, there would always be the software to support it. The dot.com buying mania is much the same. The Big Boys want to control the infrastructure. If your 18-wheelers can't access the 401, you can't sell product. If AOL puts your product at the end of a search with 2085 matches, you're SOL.