BUSINESS

PLUGGING IN TO PROFITS

Big business races to cash in on the Internet

ROSS LAVER,ANN BROCKLEHURST December 11 1995
BUSINESS

PLUGGING IN TO PROFITS

Big business races to cash in on the Internet

ROSS LAVER,ANN BROCKLEHURST December 11 1995

PLUGGING IN TO PROFITS

BUSINESS

BY ROSS LAVER

Ever since home computer users began swarming onto the Internet in huge numbers in 1993, corporate bosses and hungry investors have been asking themselves one key question: “How can we make money from this thing?” The answer is more complicated than it might seem. Even now, a large proportion of the travellers on the information highway are scholars, scientists and hard-core techies—people who are often loath to see the on-line community transformed into the world’s most crowded shopping mall. But whether purists like it or not, the Internet has already evolved into a multibillion-dollar industry. And in the boardrooms of corporate Canada, the race to cash in on the Net’s explosive growth has suddenly become a stampede. Consider a few of the developments last week alone:

• Newly issued shares in iStar internet inc. of Ottawa, which claims to be Canada’s leading provider of Internet access services, hit the Toronto Stock Exchange and immediately jumped from $12 to $22, before slipping back to close the week at $17. Analysts said demand for the stock was 15 to 20 times greater than the supply.

• Rogers Cablesystems Ltd., the country’s largest cable company, unveiled a new service that will link home computers to the Internet via cable, rather than phone lines. Called Rogers Wave, the service uses a recently developed cable modem that transmits data at speeds 17 times faster than the fastest standard modem and 35 times faster than the modems commonly installed on new home computers. The company is launching the service in Newmarket, Ont., with plans to expand it across Canada in 1996 and 1997 in partnership with

Shaw Communications Inc. of Calgary and Groupe Vidéotron Ltée of Montreal.

• Bell Canada, the country’s largest telephone company, began marketing its own Internet access service, dubbed Sympatico, to customers in major cities in Ontario and Quebec. In doing so, Bell signalled its intention to compete with the more than 150 smaller companies in those provinces that provide access to the Internet over local phone lines.

• Canada’s biggest financial institution, the Royal Bank, said that by the end of next year its customers will be able to pay bills, transfer funds and access other bank services from their home computers by dialling directly into the bank’s own host computers. Company officials said they intend to make the service available on the Internet as soon as they are sure that they can safeguard client confidentiality. In the coming months, the rest of Canada’s big banks plan to roll out similar on-line banking projects. Privately, they say they fear competition from software giants such as Microsoft Corp., which could use the Internet to deliver financial services similar to those offered by the banks.

Big business races to cash in on the Internet

Taken together, those announcements signal an important change. As recently as last year, many corporate executives regarded the Internet as a fad whose popularity would soon fade, like CB radio. But its growth shows no sign of slowing: in the past three years the number of Internet users has exploded from a few million to as many as 70 million worldwide. Some forecasts say the number could reach one billion by the year 2000. Moreover, software developers are continually coming up with new and more sophisticated ways to use the Internet and its graphics-rich offshoot, the World Wide Web. Microsoft founder Bill Gates, who recently made the development of Internet software his company’s top priority, says the global computer network has the potential to become “the ultimate market.” Explains Gates: “It will be where we social animals will sell, trade, invest, haggle, pick stuff up, argue, meet new people, and hang out.”

Is Gates right? Nobody really knows for sure, in part because things are moving so quickly that anything seems possible. But on Wall Street and on Bay Street, few investors are anxious to place bets against a man who has already amassed a personal fortune of more than $20 billion from the sale of computer software. As a result, Internet stocks—a category that did not even exist two years ago—are among the hottest properties in this year’s bull market. Example: shares in Netscape Communications Corp. of Mountain View, Calif., maker of the most popular Web “browser” software—a program that allows users to move from one Web site to another, downloading text, graphics, audio and video files—hit the market on Aug. 9 at $38, but immediately leapt to $78. Many market

watchers denounced the initial buying frenzy, noting that the ninemonth-old company is still losing money and its most popular product, Netscape Navigator, is distributed on the Internet for free. Yet last week, Netscape shares were trading at $185, after a one-day increase of $27 when a prominent New York City brokerage predicted that they could reach $270 in the next two years. Last week’s initial share offering by Ottawa-based iStar did not come close to matching that performance, but it was still one of the most successful Canadian stock-market launches in memory. Smart investors—those who sold their stock in the first half-hour of tradingpocketed a tidy 48-per-cent profit. Based on the closing share price, the

stock market has pegged the company’s value at about $317 million, an impressive figure considering that ¡Star still has only 20,000 subscribers and lost $499,071 in the most recent quarter on sales of $2.44 million. And there may be more to come: on Bay Street, investors are now feverishly anticipating the initial share offering of Open Text Corp., a rapidly growing Waterloo, Ont., company that has developed a popular form of Websearching software. Already, some analysts are predicting that Open Text shares will double or triple in the first week of trading, based on a rumored offering price of $24. Of course, stock-market frenzies have a habit of burning out, leaving a lot of investors sadder if no wiser. And many of today’s hot Internet companies will probably not even be in business five years from now, having been swept aside by an industry notorious for its breathtaking pace of change. But investors are gambling that at least a few of them will survive the inevitable shakeout, and will be worth many times their

present value. “There’s no doubt in my mind that in the current fervor, a lot of Internet stocks are overpriced,” says Rayan Zachariassen, president of Toronto-based UUNET Canada, Inc., which provides Internet services to about 1,000 business and professional clients. “A lot of people look at the Net and see nothing but dollar signs. But on the other hand, what would you give to have bought utilities 100 years ago? The smart people are in this for the long-term gain.” Zachariassen, in fact, was among the first Canadians to realize the Net’s commercial potential. In 1991, he left his job as a University of Toronto computer scientist to help set up UUNET, one of the country’s first commercial Internet service providers (before that, users generally had to have access to a university or government computer network). Now, it and

the estimated 350 other independent Internet providers across Canada are facing new competition from the giants of the communications industry, including Bell and Rogers. Many industry watchers anticipate a bloodbath. “At the turn of the century there were about 1,000 automobile manufacturers in the U.S., but a few decades later there were only three,” says Don Tapscott, an information technologies consultant and author of The Digital Economy. “The same thing is going to happen to the Internet providers, with the small ones disappearing and the big ones driving down prices.” For now, most of those smaller companies are holding their ground. They maintain that by emphasizing customer service and customized products, they can convince their clients not to switch over to one of the huge conglomerates. ‘Typically, end users need a lot of support,” says David Berzins, 28, president of Calgary’s Nucleus Information Service Inc., which has about 1,000 customers who pay $19.95 a month for unlimited Internet access. Still, Berzins adds that he is in the business because he loves computers, not to get rich quick. That is probably just as well, given that the number of such companies in Calgary has gone from zero to 25 in three years. As he puts it, “The Internet market is cutthroat.” And about to become even more so. Of all the announcements last week, the fact that Canada’s cable companies are jumping headlong into the Internet business will almost certainly have the most dramatic impact on the nascent Internet industry. As cable modems gain in speed, home computer users will eventually be able to access the Web as much as 1,000 times faster than today’s standard telephone modems. Instead of waiting several minutes to download a graphics file or a piece of software, the task could be accomplished in seconds, or even fractions of seconds. At that point, it will become feasible to pump all sorts of products directly into the home: multimedia books, music, movies, games and any other application that can be imagined. Just as easily, businesses that figure out how to exploit the Web will be able to pump money out of the bank accounts of digital-age consumers.

ANN BROCKLEHURST