10 stories that shook the 'Net

If 1998 was the year the Internet came of age, 1999 was the year Internet business grew up. The shifts were most apparent on Wall Street. Merrill Lynch and Goldman Sachs got Net religion. Nasdaq and the New York Stock Exchange got smart about electronic communications networks. United Parcel Service got a big IPO boost by - you guessed it - talking about Net business.

On the e-commerce front, staid Procter & Gamble teamed with a venture capital company to launch a beauty site, Reflect.com. Sears.com became the brightest thing to come out of Sears, Roebuck & Co. in decades. Amazon.com is now one of the U.S. Postal Service's biggest customers. And you can't sit through an evening of Friends and ER without seeing a dozen or so dot-com ads.

The numbers tell a similar story: $US50 million backing Reflect.com; an estimated $US1.7 billion in dot-com ad spending this year; $56 million in Amazon packages shipped by Priority Mail. Internet market caps may be outlandish, but figures like those don't lie.

Enter the Big Boys

First it was Nike. Then Merrill Lynch. Nordstrom and Sotheby's got serious, too. This year some of the biggest companies in the world got religious about dot-com. They invested millions to staff up, scale out and morph their tired "brochureware" Web sites into businesses.

Both Nordstrom and auctioneer Sotheby's announced plans to create separate business units for their e-commerce ventures. And they weren't shy about calling on outsiders for help. Benchmark Capital and Madrona Investment Group have invested in Nordstrom.com; Amazon sunk cash into Sotheby's.

But few ventures made more waves than the online transitions made by Merrill Lynch and Nike. Merrill this month unveiled its online brokerage, marking a complete about-face from last year, when John "Launny" Steffens, its vice chairman, called Internet trading a "serious threat to Americans' financial lives."

Merrill's 180-switch comes on the heels of PaineWebber's late-summer launch of a limited Internet trading service and Morgan Stanley's October move to bring its Discover Brokerage online-trading unit in-house.

Nike's decision to sell products on its Web site was a clear statement: "We're Nike. We dominate the market. We don't need to fret about retailer backlash." In November, Nike began taking orders for customised shoes. Other manufacturers have caught the build-to-order bug, too. Procter & Gamble is doing it with cosmetics. Customised Levi's, Maidenform bras, bikes and golf clubs are also available on the Net.

If only we could order politicians that way.

(by Bernhard Warner in New York)

The Monopolist

Not since the robber barons of the early 1900s has a company been so chastised by the US courts for using monopoly power to thwart competition. Eighteen months after the federal government and 19 states first filed a broad antitrust suit against Microsoft, District Court Judge Thomas Penfield Jackson found that the company has a monopoly.

The question of what to do about Microsoft looms larger over the legal establishment than perhaps any business issue of our time, and the outcome of the case has the potential to dictate the terms of competition in the information age.

Breakup or a wrist slap? Share the Windows source code or auction it to rival companies? Demand that all computer-makers be charged the same amount to license Windows, or force the separation of the operating system division from the applications and Internet divisions?

Those are the questions government lawyers are pondering. There's so much division of opinion about how to sanction Microsoft that Jackson took the unusual step of appointing a mediator. Settlement talks began last month in Chicago.

But while the judge clearly painted Microsoft as a monopoly (he dismissed the company's defense - that it doesn't dominate operating system software, that it doesn't stifle distribution of other software, that the industry is changing so fast that no company can remain dominant for long - as "specious"), Bill Gates is still considered a hero by most Americans. A Gallup poll found that 68 percent of consumers have a favorable view of Gates, a rating similar to that of GOP presidential front-runner George W. Bush.

Nothing But Net Stocks

The bubble did not burst. Instead, it got bigger. And the key question for investors was no longer whether to invest in the Net, but how.

Net stocks rocketed up this year, far outpacing other sectors. The Street.com Internet Sector index increased by 164 percent for the 12 months ended Nov. 30, while the Dow Jones Industrial Average and the Standard & Poor's 500 each grew 19%.

In a strong sign that everyone - everyone - is betting on the Net, most institutional investors shed any remaining reticence about sinking money into Internet companies, and the established university endowment funds and pension funds looked to step up the amount they're putting into Internet startups.

At least 16 new Internet mutual funds are about to open, pending approval from federal regulators, more than double the number currently available. With funds like the Amerindo Technology Fund reporting returns of roughly 200 percent, it's not surprising that a recent survey revealed that 78 percent of mutual fund companies plan to increase their Internet budgets by at least 10 percent next year.

What made this possible is the boom in public offerings of Internet companies, which has increased the supply of investment opportunities. About 200 Net businesses have had IPOs so far this year, double the combined total in the four previous years.

Of course, there have been some bumps in the road. From April through August, Net stock prices generally declined amid talk that the bubble was deflating. But what has emerged since is a strong market for Net companies.

Demand and supply for these companies is robust, a fundamental change from a few years ago, says Dyan G. Triffo, a director at Deutsche Banc Alex. Brown. "I liken it to waking up one morning and finding a Starbucks on every corner."

Dot-Com Ad Mania

The Internet may be the great one-to-one marketplace, but dot-com advertising this year was mass, mass, mass. By year's end, Internet companies will have spent an estimated $1.7 billion on mass-media advertising, according to Forrester Research, more than double what they spent last year.

These days, a billboard in a high-tech neighborhood is harder to come by than a parking space in San Francisco. Radio stations also experienced a huge increase in demand, a change largely attributable to the influx of dot-com dollars.

Few upstarts let lack of profits get in the way of big ad spending. Many found themselves in the enviable position of holding virtual blank checks signed by VCs, or money to burn from huge IPOs.

Some offline companies made their way into big-time advertising via online divisions. Nordstrom had never run a national ad campaign until the birth of Nordstrom.com, a brand that got a $17 million, month-and-a-half-long advertising blitz.

And the dot-com ad craze has only just begun. More than a dozen companies are running Super Bowl commercials, precious commodities that cost nearly $2 million a pop. Dot-coms have also paid celebrity spokespeople princely sums - including stock options - to make their brands memorable. CBS is reportedly trading airtime for equity stakes.

Which companies will be around to advertise next year? That will be the real game to watch.

Auctions Everywhere

Forget about being "Amazoned." This could well be the year of getting "eBayed."

In April, eBay spent $260 million to buy Butterfield & Butterfield, a 134-year-old icon of the auction world. Beyond its size, the deal had symbolic significance: The once rarefied world of auctions now goes mainstream, and the popularity of online auctions unleashed a tidal wave of new pricing models.

"This is year one of the trend toward dynamic pricing," says Scott Randall, president and CEO of FairMarket, a company that operates a network of more than 100 auction houses.

EBay continues to lead the auction world. It's amassed nearly 8 million users; more than $8 million in goods is sold on eBay every day. That success has spawned as many as 1,000 imitators.

But there's more to the craze than person-to-person auctions. Business auctions could soon eclipse the eBays of the world.

According to market-research firm Keenan Vision, 70 percent of the nearly $12 billion spent at auctionlike marketplaces went to businesses that sell to consumers or other businesses. That figure is expected to grow to 75 percent by next year.

VC Becomes a Household Word

A lot of entrepreneurs probably would say it actually happened much earlier, but in many respects 1999 was the year the venture capitalists started to play God.

You couldn't turn the page in a newspaper business section or magazine finance section without reading about how this VC was "building a company" or that VC was "incubating" a business. The way the VCs were talking, it didn't matter what the company sold or who was running it, the VCs would build the business and the rest would take care of itself.

Simply by getting funding from the "right" set of VCs, Web startups gained instant cachet with the business press, banks and larger companies.

Of course, the irony of this notion - that one VC's money is worth more than another's - is that seemingly every VC had piles of money to spend. In fact, if an entrepreneur had half an idea and a resume that said "Yahoo" on it somewhere, he or she could get funded in no time at all.

In 1999, some VCs did take steps to more aggressively build companies, such as hiring in-house recruiters or adopting incubator models like Idealab. So instead of worrying about the mundane infrastructure tasks that nettled CEOs of the past, new Web CEOs have to worry only about vision - and how to keep the VCs off their back.

Doctor, Doctor

If there's a poster boy for the rise of online healthcare, it's WebMD founder Jeff Arnold. In six months the 29-year-old Atlantan went from just another obscure startup CEO to a paper billionaire, thanks to the merger of his medical information site with Healtheon, which connects doctors, patients and insurers over the Internet.

The connection created more commotion on Wall Street than in doctors' offices; relatively few physicians use the Internet as part of their practice. But with investors giving Healtheon/WebMD a multibillion-dollar valuation, online health care has come of age - at least on Wall Street. Drkoop.com and Medscape completed successful initial public offerings and consumer medical site Mediconsult.com acquired Physicians' Online.

Venture funding flowed to a host of new Internet health-care companies. Consumers can now create electronic medical records and sign up for clinical drug trials online. Other services will allow people without health insurance to go online to get discounted medical care or challenge their hospital bills. Meanwhile, medical software makers moved to the Web to compete against the Net upstarts.

Everyone wants a piece of the trillion-dollar medical industry and the consumers who are increasingly turning to the Internet to empower themselves against a bureaucratic and unresponsive health-care system. The challenge for 2000 will be to make doctors as excited about it as Wall Street analysts.

Playing Our Song

The MP3 revolution hit last spring, pitting the major record labels against college students and Internet companies that stood to make a killing.

The open file format caught the public's imagination: Here was a way to sidestep high CD costs. Pirates simply copied CDs using shareware endcoders, then traded the songs over the Net for free. The Recording Industry Association of America struck back with its own "secure" method of distributing music over the Internet, but the move came too late to stop the surge of MP3.

Shining in the spotlight was a cocky software engineer who owned the MP3.com domain name: Michael Robertson. Robertson cast himself as the spokesman for the MP3 revolution, hurling insults at the traditional record industry and its royalty structures.

Though MP3.com has no claim to the technology itself, that didn't stop investors from bidding the company up. Its July IPO raised $361.3 million, making it one of the biggest IPOs of the year.

Others rushed to imitate MP3.com. Universal Music Group announced it would form its own online vehicle to discover unsigned bands through its MP3 formats. Recently, CDnow said it would ditch its retail focus to concentrate on being a "destination site," with an unsigned bands area called Cosmic Music Network.

One World, One Phone

Mergers galore is the short story in telecommunications. The long story is headaches galore.

Consider the proposed MCI WorldCom-Sprint merger. It's turning into a $115 billion headache. In data networking, Sprint had a good idea with its ION network, but execution has been poor. MCI WorldCom has no well-articulated networking vision. Neither company has a compelling consumer Internet strategy. And while both may realize significant benefits from combining their Internet backbones, the merger of the two networks will also cause massive redundancies.

And AT&T, which had the bright idea to buy cable networks as a way to sell consumer services, has felt more pain than it initially expected. First, upgrading the cable plant it inherited from TCI and MediaOne is proving quite laborious and expensive. Second, it's been forced to fight a tedious legal challenge to its cable monopolies in municipal town halls and federal courthouses around the country.

But these hurdles won't stop companies from making more acquisitions. Despite the dubious benefits to consumers, shareholders love the deals. And despite tough talk from FCC Chairman William Kennard, the FCC has proven quite willing to approve the megamergers.

Over a year ago, joint ventures and partnerships were the popular route. But only AT&T and British Telecom are pursuing that route in an international scheme. Soaring stock prices will underwrite many more mergers, and as long as companies can get away with it, acquisitions will be the rule next year, too.

Trading Places

Executives at the New York Stock Exchange and Nasdaq will likely remember 1999 as the year of the ECN. Electronic communications networks are computer networks that electronically match buy and sell orders, enabling more efficient and cheaper trades than the stock exchanges' human counterparts can offer.

A year ago, few on Wall Street had even heard of ECNs, save Instinet, the decade-old, Reuters-owned ECN for institutions. Nine such systems exist today, with financial backing from all major Wall Street investment banks. Orders flow from all of the top online brokerages.

ECNs also were the impetus for this year's after-hours trading revolution. Simply by flipping a switch, ECNs can accommodate post-market trades for online brokerage customers. Although round-the-clock investing has yet to gain significant volume, it's no longer a vision of the future.

The kicker for Nasdaq and the NYSE this year came when the SEC gave ECNs the green light to become full-blown exchanges themselves; three have since filed applications for exchange status. With the rise of the ECNs, Nasdaq and the NYSE have announced their intention to restructure and examine extended-hour trading. The exchanges both plan to become for-profit, publicly traded companies next year.

(by Megan Barnett)