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Those who empower, win. Those who protect, lose.
Believe it or not, that simple principle is all you need to know when it comes to investing in the trend to distribute the world’s information and entertainment content on the internet.
The key is to buy internet companies when they are working to empower their user base and to sell them soon after they shift to protecting their own interests. You have seen the scenario played out repeatedly since Netscape first ushered the internet revolution into the public markets more than a decade ago.
Netscape and America Online were clear examples of this dynamic in years past. Yahoo and eBay are properties that shareholders should already have sold. News Corporation and its social networking site MySpace have started working on the protection part of this “revolutionomics” principle. You can stick with Google and its still end-user empowering ways for the foreseeable future, but you will have to stay on top of its strategies and when it gets serious about protecting the company’s interests at the expense of its end users, it may be time to sell the stock.
When Netscape first rolled out to the consumer, there was no doubting the empowerment it ushered in. By creating a browser application of mostly open standards, users instantly had access to real-time text and picture-based information. But Microsoft soon undermined Netscape’s business model by offering its browser free and bundling it with the Windows operating system monopoly. Netscape took the battle to the courts and retreated.
Within two years of the company’s decision to protect its own interests rather than focus on empowering the end user, Netscape’s stock had lost most of its market value. It was sold to AOL for a small fraction of what it had once been worth.
AOL similarly burst on to the scene and immediately found huge success as its version of browsing the internet through AOL’s whole software system empowered tech-neophytes and Luddites to access information and communicate in new ways such as e-mail and instant messaging. In 2000, as the market was finally starting to extrapolate the huge growth that years of empowering end users had brought AOL, the company rolled out its most closed system and merged with Time Warner. The media conglomerate barely staved off bankruptcy in the collapse that followed.
In the late 1990s, Yahoo was the open-internet answer to AOL. Nowadays when you go to a Yahoo website, the company tries to direct you towards other Yahoo properties and Yahoo-branded content. Yahoo cannot effectively compete on generating content with the 1.5bn people who do so on blogs, YouTube, the online video site, or with established content brands such as the Financial Times or Vogue. It is clear Yahoo is no longer focused on empowering the end user, but rather working to protect and monetise its own interests.
MySpace.com quickly became one of the most popular sites on the internet when it empowered music fans to share songs and communicate about music in ever easier ways. That empowerment quickly spread. The site’s music theme was downplayed as the company focused on empowering more users with new technologies. As soon as News Corp bought MySpace the focus shifted toward monetising and protecting that user base. MySpace continues to grow as it has gone mainstream, and News Corp will show big earnings growth as it monetises that base. But unless News Corp finds another empowering property such as MySpace in the meantime, I will be looking to sell my News Corp position in the next year or two.
Google, which has been truer to the empowerment principle than any other company, continues to act as an open and de facto conduit to the world’s information. But as it adds content-ownership properties such as YouTube to its asset base, the incentives rise for it to become a protector. For now, I am sticking with Google, which I have owned since it went public, and indeed recently bought more shares.
Consider the virtuous entropy of creating shareholder value through empowering end users a 21st century update to Adam’s Smith invisible hand.
Cody Willard is a hedge fund manager at CL
Willard Capital firstname.lastname@example.org