After a short respite yesterday, the tech wreck proceeded apace today, as the NASDAQ fell 94 points, with some of the sharpest tumbles being taken by the giants–Cisco, Sun Microsystems, Dell, Intel–that had driven the index to an all-time high as recently as Feb. 1. (Full disclosure: I own Cisco and Sun … well, I don’t own the actual companies, just shares in them.) The tech sell-off has been driven by no real bad news, other than Advanced Micro Devices’ announcement that, as usual, it screwed up again in its futile attempt to best Intel. And today’s sell-off unexpectedly coincided with the Goldman Sachs technology conference, which is usually a signal to buy. Investors appear simply to have decided that the air up here is a little too thin.
Accepting, as we have to, that there’s never one reason for the kind of wholesale selling we saw today (especially when so much of it was program-driven), it’s still interesting that the morning began with the announcement that Internet portal site Lycos was essentially selling itself to Barry Diller’s USA Network, his hybrid of what was Universal Television and the Home Shopping Network. Lycos shareholders reacted badly to the deal, sending the company’s stock down 26 percent on the day, and shareholders in Diller’s other venture, Ticketmaster/City Search (which is also part of the deal), also cut that company’s market capitalization by a quarter. USA’s shares, however, rose.
As with of all Diller’s deals, this one is enormously complex, and in fact it was difficult–perhaps impossible–to figure exactly how much USA was paying for Lycos. What was clear, though, was that the buyout premium was nothing like the 75 percent bonus At Home shelled out for Excite a few weeks ago or like the 35 percent premium Yahoo paid for GeoCities. And the fact that Lycos took the deal, even after weeks of insisting that it was going to remain independent and reams of commentary on how undervalued the company was relative to its peers, suggests that the company’s management itself thought current valuations were not sustainable.
In a column yesterday in New York magazine, I argued that the real fear people had about the Net stock bubble was not that it would burst, but that when it did burst it would take the tech sector down with it. (For more on the stock market bubble, see the current Slate “Dialogue .”) That may not be exactly what happened today, but it may not be exactly what didn’t happen today, either. Amazon, Yahoo, AOL, Excite: these were all down between 7-10 percent today, and some of these stocks are now more than 30 percent off their 52-week highs. At the same time, the aforementioned tech powerhouses have in general fallen close to 20 percent from their peaks. The valuation pyramid has become a fragile one, and tech and Net stocks are still too intertwined for changes in one not to affect the other. In the long run, that won’t endure. Cisco and Microsoft and Dell are expensive, but they’re also generating profits at remarkable rates at a time when most of the S&P is struggling to grow profits at all. But there may still be some pain in the meantime.
The more interesting point about the Lycos deal, though, is that it explicitly places electronic commerce at the center of Net economics. In other words, by accepting the alliance with the Home Shopping Network, Lycos is essentially asserting that the future of the Net is not really media, but rather shopping. Now, on the one hand, this may be obvious. Michael Wolff says the same thing at the end of his book Burn Rate, and Amazon’s whole business has been built around that premise. On the other hand, though, it’s important that investors fled when they realized that Lycos saw itself as simply an Internet version of HSN. You can make a good business out of retailing. But can you make a good business that deserves to be valued at 20 times your annual revenues? For the moment, the market has answered: No.