One click away from internet fortune

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In 1992, I’m afraid, I was an addict. It got to the point where I was losing my friends and family, and it was harming my job performance. My only friends were my fellow addicts.

Specifically, all day long, every day, I would play chess online: one-minute games where my opponent and I would take one minute each to make all our moves. Whoever ran out of time first (or was checkmated first) would lose. My opponents were from Norway, Israel, South America, even Russia. I would walk to work with my girlfriend at the time and I would tell her “today I won’t play chess at all”. Then I would get to work and tell myself “well, one game won’t hurt” and I’d log on to what is now www.chessclub.com and play a game or two.

If I was on a roll then I couldn’t stop. And if I was losing, I’d have to keep playing until I started winning again. I’d have intermittent breaks for “meet­ings” with people who thought they were my co-workers. I’d keep playing until midnight, 1am, 2am, all night sometimes, and stumble home just to change clothes. It was ugly and I was scared.

Scared because the truth finally hit me. It was never going away. It’s not as if this internet chess club was a temporary thing. This was here for ever and it was only going to get worse.

Finally, a friend of mine helped wean me off the online chess server. He showed me a piece of software called Mosaic, which could download and format images and text off the internet. Also audio, but only if you wanted to wait two hours for a download. The worldwide web was just starting and there were maybe a few hundred websites at the time.

During this period, I would take the occasional bathroom break from my chess games and I’d see another guy wandering the halls around midnight or so. He told me he was working on something that could read text and catalogue it and he was testing it out by retrieving pages from the few websites there were. He was hoping for government funding so he could work on his little hobby during the day.

“Yeah, right,” I thought to myself as I locked my office door behind me for another session of one-minute chess. “Good luck with that.”

He went back to his computer, which was named lycos.cs.cmu.edu and eventually became the computer for the search engine he created, Lycos. It helped his net worth top 9 figures by 1997.

This brings me to my point: what happened to Lycos? It was a multibillion-dollar search engine. It became Terra Lycos. Then it was absorbed into Telefónica, Spain’s biggest phone company. And what happened to Excite? It was sold for pennies to what became Ask Jeeves, which was bought by InterActive Corp for $1.85bn.

And what’s becoming of Yahoo? The rumour is it will be bought by Microsoft. AOL, of course, went to Time Warner. All the internet stock that flooded the market in the 1990s is being bought, privatised, consolidated and sucked out of the market, leaving only a few megacap survivors such as Google, Ebay and Amazon.

As in any market, the prices of internet stocks are ruled by supply and demand. Without supply, and with demand increasing because of the flush of liquidity driven by potential acquisitions of Yahoo, Dow Jones and Reuters, the prices of internet stocks would rocket. But where are all the internet stocks?

The good news is, they are in hiding. Many old-school companies are quietly transforming themselves into the next generation of internet players. JC Penney, for instance, is one of my fav­ourite internet companies. E-commerce is the fastest growing part of its business. Its store just made it into the top 10 internet retailers, with $1bn in revenues. E-commerce sales are rising 27 per cent year on year and represent 44 per cent of catalogue business.

With e-commerce moving from 1 per cent of total US retail sales in 2000 to 3.3 per cent in 2006, and with JC Penney having one of the fastest growing e-commerce sites, this will become incr­easingly important.

Then there is an internet company that is in a very hot sector: selling junked vehicles for their scrap metal. Copart is an intermediary in the salvage vehicle business. Quietly, it has become one of the largest and most profitable retailers on the internet.

Almost all its business is conducted through online auctions. It had revenues last year of $547m and earnings before depreciation, interest, taxes and amortisation of $236m. It has $319m of cash in the bank and no debt and trades at a forward price/earnings ratio of 17.

Lack of space prevents me from describing more but check out my absolute favourite internet company, Illinois Tool Works, which recently acquired Click Commerce.

Do I still play chess online? Of course! But I try to keep it balanced. That said, if you ever call me on the phone and it sounds as if I’m not really paying attention it’s almost a guarantee I’m about to get checkmated.

james@formulacapital.com

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