Sun Above, Death Below

Sun Above, Death Below

Richard Greenberg majored in intellectual history at the University of Pennsylvania. He explains that intellectual history is a discipline which tracks how great thinkers of the past were shaped by the forces around them at the time and how the effects of their thinking then shaped their times. So how will intellectual historians of the future judge us? "Probably quite cruelly," Greenberg responds. Certainly there might be a few guffaws about the sharemarket bubble which emerged around some pure-play Internet companies which peddled blue sky and little else. But the flip side of intellectual history is that society can learn from past mistakes. And the lessons from the NASDAQ bubble are being learned very swiftly.

Greenberg himself is acting as a teacher. He is now the chief strategy officer for CCG.XM. This New York-headquartered online group recently spun out from the marketing and advertising giant Cordiant Communications Group, itself the result of a demerger between Cordiant and Saatchi & Saatchi. CCG.XM's role is to offer clients, and chiefly old economy big businesses, a plethora of services that will allow them to create online infrastructures connecting them with the end user, be that business or consumer.

CCG.XM is a new economy product of the old economy and is tipped to be publicly listed next year. "We have every intention to realise our value from the financial markets," Greenberg says. But the company won't list until it has annual revenues of $US100 million. It isn't flogging blue-sky futures.

Greenberg believes that since the NASDAQ bubble was pricked in April, "there has been a flight to quality in terms of labour, capital and clients". He says that this has helped ease the flow of talent for the old economy players such as Cordiant, which is a "much more attractive place to work in than a shop with 22-year-olds. Dotcoms are uneasy places to work at. What enabled people to endure that was the prospect of the blue sky and the options."As that has evaporated so has the appetite for the dotcoms. Now more skilled people are available to work in traditional companies which are developing online businesses. Greenberg believes that not only will the traditional companies benefit but also that the dotcom companies which do survive this sea change in investor attitude will also emerge stronger because they will be forced to mature. Paul Little is the managing director of an old economy company which has a firm toehold in the new economy. Toll Holdings has the largest annual revenue of any Australian trucking company. But it also has plans to spend $25 million a year on its online projects during the next three years. It wants to reform its services so that customers can track their consignments from go to whoa; it wants to offer Internet fulfilment services, delivering goods ordered from the Internet; and it wants to seize the benefits of business to business trade for itself by reforming its back office and procedures.

Says Little: "How important is it for a company to have an e-commerce strategy? There is nothing more important quite frankly." He believes it will also prompt a fundamental shift in the way transport companies compete. "I can't speak on behalf of the industry generally, but Toll and the industry has laboured for many years judged simply on price. Because of that the industry is very competitive and has provided inadequate returns on investment. The new technology delivers a unique opportunity to achieve better returns and grow the size of the market." Little's enthusiasm for online initiatives wasn't dampened by the NASDAQ correction in April. He believes that investors are generally astute and will recognise the benefits that can be drawn from sound strategy; and that "the opportunities from B2B are real and substantial". Investors and analysts have rewarded Toll's online strategy. Macquarie Equities has the company as one of its top 20 e-commerce players, and the share price of the company almost doubled in the first half of this year.

Old economy companies which point to the NASDAQ correction as a signal that e-commerce benefits had been oversold, and therefore a reason to opt out of e-business entirely, are doomed, Little warns. "Anyone without a view of how this new economy will affect business will clearly be marginalised and their offerings commoditised. Those groups will continue to fight on price alone rather than gaining an understanding of the opportunities that can come through technology and e-commerce.

"Those who invest inadequately in the upside will be punished by the market," Little says.

It is a view shared by the director of the Boston Consulting Group's Australian and Asian e-commerce practice, Greg Sutherland. He believes that although the blue-sky companies were hyped, it is not wise for traditional companies to rest on their old economy laurels and point to solid balance sheets, and years of regular historical profits if they want to reward their shareholders with real return on investment "I think a key driver behind sharemarket value and value created is a company's growth prospects and potential. It is not just about profits today but about the potential to grow them," Sutherland says. "Growth has been, and continues to be, a problem for many Australian companies that sit in consolidated sectors of industry where they are barred by regulation from merging - which is the case, for example, with the four-pillars policy in banking.

"Global expansion has been mixed at best. So there is a growth dilemma," Sutherland warns. But he believes that the Internet and e-commerce provide a real opportunity to recast the growth opportunities, and that they can reduce the physical barriers of entry into new markets for many old companies.

What investors are now rewarding are the old economy companies which are recognising the growth prospects that are on offer to them courtesy of the Internet and e-commerce. "I think that in many ways - quite validly - companies that are able to show and demonstrate that they can leverage their brand via the Internet will attract a higher market rating and valuation, which is in stark contrast now to the market appetite for pure-play start-ups," Sutherland says. He characterises today's sharemarket, investors and analysts alike, as far more discriminating than that which was in force at the turn of the year.

Macquarie Equities analyst Tim Rocks concurs. Rocks says that at the beginning of the year few analysts had fully turned their attention to the implications of the Internet for traditional companies, and preferred to focus on the new players. He says that since January, Macquarie has been working on the premise that "you don't go into dotcoms, you go into old economy companies because they will be the real winners". The key to selecting investment opportunities, he says, is to identify which of the old economy companies is best able to take advantage of new technologies. As yet, though, the attitude has not percolated to the wider investment community. Rocks admits that although the dotcoms "are on the nose", investors are not yet fully rewarding those old economy companies which are transforming their business using e-commerce techniques.

"People are still a bit cynical about their ability to deliver," Rocks says.

"Coles Myer was the classic. They announced a strategy but have not done anything. The market wants evidence that it works and that they will make money out of it," Rocks adds. Similarly, the Commonwealth Bank of Australia has a clearly enunciated e-commerce strategy "but there are as yet no numbers flowing through to the bottom line", he says. Consequently, investors are playing the waiting game, to see if management rhetoric will trickle down to the bottom line. Investors, it would seem, have earned their stripes on savvy street.

It is frustrating for directors who may have invested heavily in online plans but see no benefits yet passed through to their share price. They know they have to update in order to remain competitive, but they cannot yet show shareholders the benefits; consequently shareholders are sceptical. Directors, however, have little choice but to plough on and continue to invest and believe that ultimately that investment will pay off.

CIOs have seen it all before. Each incarnation of computing - be it mainframes, minicomputers, personal computers or now the Internet - has promised competitive advantage which management seizes as an opportunity to improve market valuation. But as all businesses jumps on the computing bandwagon, so computing simply becomes a necessary cost of doing business rather than a silver bullet for the share price.

The sharemarket finally recognised this about the Internet in April. Rocks claims that it was "all a part of the market correction - that you do not reward blue sky in the new economy, or blue sky in the old economy, companies until they have the runs on the board. "Until March people thought technology could do anything. Well no longer," he says.

One person who is relieved by this approach is Kerry Plowright, the managing director of Internet company Australian Windows Publishing, which sells tools to companies to e-enable their business. He baulks at being described as a dotcom, the company is really an e-enabler. He also stresses the infancy of the sector. "We have only achieved 1 to 2 per cent penetration of where this technology is going," Plowright says. Although the new technology has made headlines for some time, he adds, "it's just another medium through which to channel business; it doesn't change the business".

And nor should companies involved in this new technology consider that they are any different from any other business, he warns. "Our company is not a start-up; we are six years old now. I look at a lot of other companies and scratch my head. I run my business as a cash-flow business; I am not running the business on the basis of a float." His plans involve either listing the company or achieving a trade sale, "but that is not the goal in itself".

Plowright finds the fact that some dotcoms have to float in order to survive to be a "scary" situation.

Although the April rout cleared out some of the problem companies, he believes there is still "a lot of blue sky left in the dotcom economy". That has been demonstrated by reports earlier this year in the Australian Financial Review and US investment journal Barrons that identified the cash reserves of many of the newly listed dotcom companies. In some cases, those dotcom start-ups had reserves to survive only days without again turning to investors for further support.

It's a little like the stereotypical teen-ager who expects regular parental handouts to pay for petrol, CDs or holidays without recognising that the chores have to be done first. It's an economy predicated on demand rather than supply.

Irresponsible investors who continue doling out the dosh to the immature dotcom are not necessarily doing such companies any big favours in the long term.

Plowright believes that the real success stories will be the companies which implement sensible e-commerce solutions which work. He cautions companies about racing pell mell to create an e-commerce strategy. "They have to do it right, otherwise the market will say [they are] a bunch of dolts. One of our prime targets is the established bricks and mortar businesses."One company in the business of bricks and mortar is property development giant Mirvac. David Mann is the group's corporate relations manager and is comfortable with the description of Mirvac as a "traditional company". "We can't point to any e-business strategy that we've undergone that has added to the value of the company yet," he says. "We do see it as a burgeoning opportunity and we are currently developing strategies that investigate the opportunities to eventually create that value." The company manages hotels, acts as a property developer and also manages commercial, retail and industrial properties. It can certainly see the benefits of online interaction with clients. Nevertheless, Mann says: "It is a long-term strategy; we are not rushing into this. We don't want to get caught in a spiral and have the technology change on us 12 months later. We have our IT department keeping tabs on the software and the bandwidth."Investors haven't penalised Mirvac for its admittedly conservative approach, Mann says. "I don't think the share price has been affected by that [conservative] decision. There is no point in being a pioneer in our industry.

I think it will be a long time before people seriously start buying property using e-commerce; it is still an emotional decision." Mirvac has benefited in one unexpected way by the collapse of some dotcom share prices. Mann says that the market generally views shares in property trusts such as Mirvac as being less volatile than many other shares on issue. In addition, "as people have been getting out of the IT stocks and into more traditional stocks, we have benefited there from the decision to adopt a more conservative e-business strategy."Sutherland believes the more conservative investment approach will continue to separate the wheat from the chaff among the dotcom companies. "The market is much more discriminating now. These start-ups have to have an underlying basis for competitive advantage to allow them to become profitable versus the competitors and the incumbents," he says. "Interestingly, it is the large existing companies that have many advantages to allow them to leverage new opportunities through the Internet."He offers the example of online share trading companies. "Online stockbroking will scale to a quite low cost per trade. It is a definite advantage for the big players as it is expensive to create a brand, and that applies across any number of sectors. Those with an existing brand start in an advantageous position: for example Commonwealth Bank of Australia and Qantas don't have to spend a cent to let people know they have a Web site." It is an argument not lost on Ian Smith, CEO of CCG.XM. Smith is an Australian now living in New York and is a former managing director of Sydney-based advertising agency George Paterson Bates. He was in Sydney recently to launch the Australian arm of CCG.XM. Smith argues that as a side-show to the race to achieve an online brand, advertising has become a dirty word among venture capitalists. Of the money that venture capitalists invested in dotcom start-ups in 1999, he says, 63 per cent - or $US5 billion - went directly into advertising as companies attempted to create a brand.

"This was foolish money in most cases," Smith says. "The Internet was supposed to be the greatest threat to advertising. In fact, the Net gave advertising a $US5 billion shot in the arm. Now if you mention advertising to a venture capitalist they turn pale." Well they might. Smith by comparison is positively rosy-cheeked at the prospect that the big brand traditional companies are now starting to pour money into their e-commerce strategies. CCG.XM is working predominantly with big business to deliver business benefits that directly affect bottom lines. Smith offers Shell as an example of a company which has developed an internal intranet and stands to liberate savings of up to $US500 million over the next year. "People are beginning to understand the costs saved and the revenue that can be driven through e-commerce," Smith says.

The company is also working with Unilever not only to sell products online, but also to develop the online brands which Smith says are key to online success in the future. It's a question of the same old tricks applied in a different way to build brand, create loyalty and grow revenues. Greenberg stresses that although "in the beginning the Web was more anarchic and information was free, in fact the Web is just another communications mechanism. That's where our heritage is most valuable."CCG.XM is itself the new economy initiative of an old economy giant. It will ultimately deliver value to its parent by way of a float, but can leverage its old skills (advertising, marketing, brand building) and old contacts (big business for which it has developed marketing and advertising campaigns) in the new age. It then sets about doing exactly the same for its clients.

Rocks warns that not all big business will be able to reap the same level of benefits from e-enabling their business. Mining companies he predicts will benefit, but cautions that "by the very nature of their operations, it will never be a big deal for them.

They are digging things up and putting them on a truck." Other industries - particularly retailers - stand to make significant gains by embracing e-business strategies.

As Smith says, "the Internet is becoming the ultimate selling machine" where Net traffic is doubling every 100 days as more and more consumers go online. It will be a rare company which can afford to ignore that opportunity.

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More about Australian Financial ReviewAustralian Financial ReviewAustralian Windows PublishingBoston ConsultingBoston ConsultingCCG.XMColes GroupCommonwealth Bank of AustraliaCommonwealth Bank of AustraliaCommonwealth Bank of AustraliaCordiant Communications GroupMannMirvac GroupQantasToll HoldingsUnileverUnilever

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