There is no doubt that the Internet is having a dramatic effect on business and commerce and it continues to shape the global economy.
The explosion in Internet use has astonished almost everyone. It is having a dramatic impact on productivity and will help feed new ideas and products into the global economy.
The problem is that many of today’s hot Internet companies may not have sustainable growth, long-term profitability or certain futures. While seemingly speculative in terms of potential return on investment, there is little doubt that the Internet as a business model adds value to businesses and consumers alike.
Some people have drawn an analogy between the Internet Age and the California Gold Rush of 1849. When gold was discovered, thousands rushed to California with expectations of striking it rich after hearing the occasional story of a lucky prospector. When the smoke cleared, only a few gold speculators ended up anything but broke.
The same can be said about many of the Internet companies and the people who speculate on them. The recent shakeout among unprofitable dot-coms is the tip of the iceberg. Like the gold prospectors, many of the speculators on Internet companies will end up broke.
In the Gold Rush, those who focused on infrastructure and supplied the miners with shovels, picks, pans and clothing slowly made their fortunes. A similar approach can be taken to investing in the Internet.
A more conservative strategy is to invest in companies that build the infrastructure needed to support the Internet boom. In other words, participate in the Internet without investing in risky Internet start-ups, many of which are volume-driven consumer e-commerce companies that lose money. This can be accomplished by identifying established telecommunications, media, technology and other companies that are strategically positioned to benefit from the expansion of the Internet.
For example, media organizations benefit from the recurring advertising dollars spent by e-commerce companies to build brand awareness. Telecommunications companies provide the backbone and network access points for Internet access. Technology companies provide both infrastructure and services to support the Internet. Freight companies benefit from e-commerce sales because they deliver the merchandise to the consumer, thereby helping to facilitate e-commerce.
These companies are focused on providing access, content, infrastructure and services for Internet companies and users. Some people refer to them as “Internet tollkeepers.”
Internet tollkeepers are typically companies with recurring revenue streams that often dominate their industries, for which there are high barriers to entry. The goal is to identify superior long-term growth companies that are trading at fair valuations. You can attempt to identify these and invest in them directly, or you can invest in them through a mutual fund, thereby benefiting from the mutual funds professional management and diversified portfolio.
Fund managers typically use a growth investment philosophy, which seems to rule out investing in most of the hot companies in the Internet sector. Instead, they invest in established, superior long-term growth companies that are Internet tollkeepers.
The primary focus is on companies that provide Internet access, content, services and infrastructure. The holdings of these type of funds include such companies as CBS, Liberty Media, Time Warner, Walt Disney, America Online, Microsoft, Intel, First Data Corp., Cisco, AT&T, MCI WorldCom, EMC, Sun Microsystems, Oracle, Dell and UPS.
For conservative investors who are afraid of missing out on the growth of the Internet, the tollkeeper strategy is an attractive way of capitalizing on the enormous potential of the Internet that makes long-term sense. Arthur Weisman is an investment consultant with First Union Securities. He can be reached at (216) 574-7317.
