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Copyright 2000 Goldman Sachs

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Internet Tsunami:The Second Wave

Lawton FittOctober 2000

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AgendaAgenda

?What’s Happening?

?Why is it Happening? Growth and Valuation Drivers

?What are Challenges to Internet Innovation?


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What’s HappeningWhat’s Happening

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The birth of a $1.3The birth of a $1.3--trillion sectortrillion sector

$1.3Trillion

$1.3$1.3TrillionTrillion

$40$40BillionBillion

$40 $50 $64 $75 $103 $129 $129

$278

$550$626

$710

$1,633

$1,728

$1,292$1,347

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

97:Q1

97:Q2

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98:Q2

98:Q3

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99:Q2

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99:Q4

00:Q1

00:Q2

9/26/00

0

100

200

300

400

500

600

Total Market Cap

No. of companies


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Explosion in IPO activityExplosion in IPO activity

$23 $30 $69$544

$1,807$864

$1,602

$22,612

$16,415

1992 1993 1994 1995 1996 1997 1998 1999 2000YTD

$ millions

As of September 26, 2000

Deals 1 1 5 11 34 22 33 272 142

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Internet stock price history, 1998Internet stock price history, 1998--YTDYTD

GSInternetIndex+304%

NASDAQ+135%

S&P 500+47%

As of September 26, 2000

Gainsince1/1/98

0

100

200

300

400

500

600

700

800

12/3

1/19

97

2/13

/199

8

3/30

/199

8

5/12

/199

8

6/24

/199

8

8/06

/199

8

9/18

/199

8

10/3

0/19

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12/1

4/19

98

1/28

/199

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3/12

/199

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4/26

/199

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6/08

/199

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7/21

/199

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/199

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10/1

4/19

99

11/2

6/19

99

1/10

/200

0

2/23

/200

0

4/05

/200

0

5/18

/200

0

6/30

/200

0

8/14

/200

0

9/26

/200

0


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Average YTD performance by sector Average YTD performance by sector (September 26, 2000)(September 26, 2000)

-61.6%

-66.7%

-12.6%

-38.7%

-69.2%

-13.0%

-43.5%

-1.0%

-62.1%

-56.2%

-71.5%

-19.2%

-33.3%

-41.7%

-80.4%

-6.1%

Media/Portals

B2C

B2B

Application Hosting/Delivery

Media Services

Mobile Internet

Networks

Next Gen/iTV

Security

Software

Systems Integration

Investment Companies

e-Finance

e-Health

e-Learning

International

Infra

stru

ctur

e Average-45.3%

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The tidal wave of Internet venture capitalThe tidal wave of Internet venture capital

$639 $914 $1,026 $1,304 $1,234$1,679 $1,787

$2,260

$3,087

$5,470$6,224

$11,813

$14,972

144 161181 197

175

251 249288

327

498520

827

698

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

1Q97 2Q97 3Q97 4Q97 1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99 1Q000

100

200

300

400

500

600

700

800

900

1000

Val

ue o

f Int

erne

t ven

ture

dea

lsN

umber of Internet venture deals

Up 385%vs. a year

ago

Up 385%vs. a year

ago

Source: VentureOne.


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Internet Investing is Public Venture CapitalInternet Investing is Public Venture Capital

? Very few will thrive

? Few will survive

?Most Internet Companies will have the lifecycle of a firefly

? Three Likely Outcomes– Merge– Morph– Mired and/or Die

?Winner/s Take all

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ConsolidationConsolidation

$20.0

$74.4

$17.7$7.7

$201.7155

19

35

70

1997 1998 1999 2000YTD

Aggregate Transaction Value ($bn) AOL / TWX Transaction Number of Deals


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Why is it Happening?Why is it Happening?

Growth and Valuation Drivers

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Future as Clear as M.U.D.Future as Clear as M.U.D.

?Mainstream Global Adoption by Consumers and Businesses

?Ubiquity of Internet Use On-line and Off

?Driven by Silicon Economics


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Internet Just Breaking Into Mass MarketInternet Just Breaking Into Mass Market

U.S. HouseholdsU.S. Households

TimeTime

19941994

19981998

1999+1999+

0%0%--6%6%

Tech “Geeks”Tech “Geeks”

MassMass MarketMarket

> 30%> 30%6%6%--25%25%

ConsumerConsumerEarlyEarly

AdoptersAdopters

International

International0%0%––20%20%TodayToday

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Internet as a Mass MediumInternet as a Mass Medium

Source: Forbes, 1998

1 10 20 30 40 50 60 70 80 90 100 110 120

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

0

Per

cent

age

of O

wne

rshi

p Percentage of O

wnership

Number of Years (year 1 = year invented)

Internet(1991)26.0%

Cell Phone(1983)24.4%

PC(1975)40.0%

Television(1926)98.3%

Radio(1906)97.8%Microwave

(1953)84.1%

VCR(1952)79.0%

Electricity(1873)98.8%

Airplane(1903)100.0%

Telephone(1876)93.9%

Automobile(1886)76.8%


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Silicon Economics…Silicon Economics…

?Not Driving Just Computing Alone– Moore’s Law Gave us a $2+ Trillion Global Computer Industry

pre-1994

?Now Driving Communications:– Voice to Data-Driven Networks– Optical Technologies the new Microprocessor

? And Driving Connections:– Machine to Machine Connections– Plummeting Transaction Processing Costs

What are the Challenges to What are the Challenges to Internet Innovation?Internet Innovation?

Unprecedented Execution Challenges


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Illustration of Network EffectsIllustration of Network Effects

New Membership/TrafficNew Membership/Traffic

Higher Recurring Average Use

Fast

FasterFaster

Faster

Lower CostFeatures

Higher Market and Mind Share through Word-of-

Mouth and Branding

Greater Economies of Scale

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Yahoo! Breaks Away:Yahoo! Breaks Away:Prioritization and Execution is KeyPrioritization and Execution is Key

1Q96

2Q96

3Q96

4Q96

1Q97

2Q97

3Q97

4Q97

1Q98

2Q98

3Q98

4Q98

1Q99

2Q99

3Q99

4Q99

1Q00

2Q00

0

100

200

300

400

500

600

700

Ave

rage

Dai

ly P

age

Vie

ws

(mill

ions

)

680

201

137

92


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Why It Might All Makes SenseWhy It Might All Makes SenseYahoo! Operating MarginsYahoo! Operating Margins

Source: Yahoo! Management

(60)

(50)

(40)

(30)

(20)

(10)

0

10

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30

40

50

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Q2 1997

Q3 1997

Q4 1997

Q1 19

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Internet 1994Internet 1994--19991999

• The PC • The Browser-HTML

• Consumer: Dial-up via modem

• Commercial: T-1s and T-3s

• http

One Platform One Client Software Platform

One Network One Communication Protocol


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Internet: 2000Internet: 2000--20052005New Platforms New Device-Specific Applications

Next-Generation Networks

New Technologies

• Wireless Devices• TVs and set-tops• New appliances• Embedded Devices• Automobiles• Voice Portals• Off-line Portals

• Embedded Applications around:

•Communications

•Content

•Commerce

• Wired: New Backbones, Optical

• Wireless:

•Cellular, Paging,

•Fixed,

•Home and Satellite

• Flat-panel screens

• Better batteries

• Ultra-portable storage

• Open-source software

• XML Driven Databases

• Server-centric applications

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…while the Complexity Explodes…while the Complexity Explodes

Critical ingredients: ?Cross-platform integration,

applications, and content

?Ubiquitous global footprint

?Maximum scalability

?Universal targeting with privacy safeguards

?Customer service

?Pricing and billing

?Ease-of-use

Relentless force of silicon economics on:

?Computing

?Communications

?Connections

Going from hundreds of millionsGoing from hundreds of millionsto billions of addressable devicesto billions of addressable devices


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The next big thingsThe next big things

? Infrastructure Critical Again

? Blend Old and New Economy Models

? Internet Mobility

? Internet goes global

? B2B goes into second gear

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What could go wrong?What could go wrong?

? Slowdown/Transitions in User/Usage/Advertiser/Subscription/Commerce Growth

? Delays in Customer Adoption

? Profitless prosperity of e-commerce models

? Periods of– Investor Indigestion– Momentum-Driven Rolling train wrecks

? Managements Whipsawed by Growth and Profitability Imperatives– Hiring/Keeping/Motivating Employees

? Increased cross-industry competition– Consumer Spending a Zero-Sum Game?

? Regulatory actions


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Valuation Dilemmas: Valuation Dilemmas: This Is Public Venture Capital!This Is Public Venture Capital!

? Viable business model

? Market size

? Unique value

? Scaleable model

? Management

? Viral growth

? Network effect

? Valuation methodologies

? Evolve from…

? Price to sales to

? DCF to

? P/E to growth

? P/Es and/or EBITDA multiples

? …As sector matures

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What we like in Internet What we like in Internet ModelsModels? 1: First to Scale? 2: Horizontal Scale Leads to Vertical Domination

? 3: Swiss-like Neutrality Often the Key to Market Leadership? 4: Organic growth

– Leverage Core Commodization– Increase Revenue Per Customer

? 5: Open-ended Flexibility in Pursuing:– Applicable markets globally– New Value-Added Services– Multiple revenue streams

? 6: High long-term earnings and ROIC leverage

? 7: Scalable management teams

Our seven golden rules:

Our seven golden rules:


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WrapWrap--UpUp

? What’s Happening?– Mainstream Adoption Just Beginning– Old and New Economy Blending

? Why is it Happening? Growth and Valuation Drivers– Silicon Economics are the key Driver– Network Effects are the Holy Grail

? What are The Next Big Things– Ubiquity will drive Innovation

do not distribute · q1 1997 q2 1997 q3 1997 q4 1997 q1 1998 q2 1998 q3 1998 q4 1998 q1 1999 q2...

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