The internet gold rush part II

The sky is falling, or so it might seem if you're heavily invested in tech stocks. But let's face it, the vast majority of stocks in this sector have been overvalued for far too long.

The sky is falling, or so it might seem if you're heavily invested in tech stocks. But let's face it, the vast majority of stocks in this sector have been overvalued for far too long. Although the latest correction is surely an overreaction to short-term events, the changes on Wall Street will now benefit us in the long term.

Five types of companies have profited handsomely from a technology-focused Wall Street. The first type was the business-to-consumer e-commerce bunch that ignited the mad investment rage.

Today, most of the pure-play companies in this space lie in ruins or are struggling to keep afloat. In contrast, brick-and-mortar competitors with a long-term view of the internet stand to benefit the most from the business models pioneered by those pure-play start-ups.

After the B2C companies got hot, all attention turned to the site builders. The traditional consulting companies were too preoccupied with Y2K and ERP (enterprise resource planning) work to notice the web. So a host of smaller companies led by Scient, Viant and Lante seized the opportunity.

Today, most of those companies also have seen their stock valuations fall to historic lows as many of their most talented people drift back to their roots in the industry.

Business-to-business e-commerce was the next ride on the Wall Street roller coaster. Although revolutionising the entire economy with digital technologies remains a huge opportunity, investors are realising that most business revolutions are in fact evolutions that happen over substantial periods of time.

For instance, many of the concepts that drive ERP applications are just now reaching the small to midsize IT organisations that drive much of the overall sales volume. Another five full years will pass before e-business concepts such as digital exchanges become the primary way we do business. Until then, a lot of time and labour will be required, which means the vast majority of the work being done here is a long-term investment.

The fourth type of company to benefit handsomely is the service providers. Starting out as basic ISPs, they now include a whole host of dedicated ASPs (application service providers). Many people strongly feel ASPs are the forerunner of a new pay-as-you-go utility model for enterprise computing. They are probably right. But it'll also be another five years before this model becomes the industry's dominant force. For now, telecommunications companies will continue to expand their base of operations to include services offered by these companies as a feature in a larger set of services. This means that discerning which players are the likely future winners in the category is going to be anybody's guess.

Finally, we have traditional computer systems and applications companies supplying tools to the companies mining the internet gold rush. They have seen sales go up dramatically the last few years, and they've been rewarded by Wall Street investors. But as industry dynamics approach a level of normalcy, these companies also will see their valuations punished for failing to meet unrealistic expectations created by Wall Street analysts.

So what does all this add up to? To borrow from Wall Street scion EF Hutton, it means the time to make money the old-fashioned way has come back around. Only companies that deliver substantial ongoing value or profit-generating technology to IT projects are going to earn money.

With the return to those values, a remarkable thing will happen: all the market hype and noise will give way to rational thought with realistic assumptions about what technology can achieve in the short and long term.

Michael Vizard is the editor in chief of InfoWorld.

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