The digital revolution is upon us, characterised by a higher number of personal computers per capita...
The digital revolution is upon us, characterised by a higher number of personal computers per capita and significant increases in internet applications and usage.
The average American adult spends 40 minutes a day online, which is 9% of total time dedicated to media intake of all kinds.
Globally, internet users have been doubling every year since 1995 and 171.2 million people are now online and of those, 97 million registered live in the US and Canada. It is not surprising that the internet is US-centric. A great boon to users in the UK is that the lingua franca of the net is, therefore, English. Around 10% of Europe's 40 million online users are in the UK.
Internet usage, in terms of volume of traffic, is doubling every 100 days and the greatest strength of the net must be that it is accessed during working hours for corporate tasks and in leisure hours, for domestic tasks, information, education and enjoyment.
The evolution of the knowledge-based economy in the rich economies is all too evident as they depend on the creation, distribution and use of information and knowledge involving both technology and human capital. Economic theory has a problem with knowledge it seems to defy the basic economic principle of scarcity.
The internet speeds the flow of information and knowledge, by being codified in digital form, so making it easy to transmit over long distances at low cost. The word 'digital' is paramount. When a binary signal is sent in discreet packets of ones and zeros the signal can be manipulated in thousands of ways to clean it up and modify it.
Error-correcting programmes can provide nearly error-free transmission reducing the distortion and fuzziness commonly found on standard television screens. A signal from halfway around the world will be just as crisp as if it were broadcast from next door. The signal can also be enhanced and magnified as is done to the faint images sent by distant Nasa spacecraft.
The expansion of digital highways is changing business transactions although electronic commerce (e-commerce) will not provide instant riches to investors. Donaldson, Lufkin and Jenrette make a distinction between e-commerce and electronic business (e-business). E-commerce involves developing websites, some consulting with information technology and telephony capability and is highly fragmented with low barriers to entry. It is a rapidly growing business at the moment because so many companies are addressing the net and struggling to catch up and put in place some sort of e-commerce initiative.
E-business goes further as it involves transacting business and fulfiling business over the net rather than merely taking an order on the front end. E-business involves linking that back into the enterprise. It is much more encompassing, requiring much deeper skills with respect to the enterprise and an intimate understanding of that enterprise and its business plan going forward. Investment returns will probably be higher in e-business stocks.
Given that the barriers in 'the space' are low, I like to invest in companies that make the weapons rather than fight the war. I did not participate in the flotation of Freeserve, the UK's largest ISP, due to its valuation and business model. As one of my investment colleagues has surmised: "Access is free so content is key." Freeserve is rapidly improving the content of its website but their active users are too highly valued at £1,500 per customer whose loyalty has hardly been tested in the war for free access accounts.
Besides Freeserve, the UK investor has a limited number of pure plays in quoted companies involved in the net but a larger universe of businesses are embracing the net. For example, Cable & Wireless, BT, Barclays, Prudential, United News and Media and Reuters. Of the limited e-business pure plays in the UK, I like Baltimore, JSB Software, Easynet and Net Benefit.
These pure plays are good e-business investments in the main although highly valued by standard equity valuation models. Baltimore is the largest player in encryption technology outside North America through the development of their open systems, Public Key Infrastructure (PKI), software. Encryption enables data to be sent securely across the internet and virtual private networks. The Global Trust Organisation (an association of eight leading banks ABN Amro, Bank of America, Barclays, Chase Manhattan, Citigroup, Deutsche Bank and Hypo Vereinsbank) have adopted Baltimore's encryption technology for a common business-to-business transaction system to be launched next year. Unlike its competitors, Entrust and Verisign, Baltimore's software is non-proprietary and has been endorsed for global reach and expansion in the US by Intel investing in a 6% stake in the company. The company is attempting to remain ahead of the curve by embracing elliptical curve cryptography in its next generation of software, and well into the next century will keep a weather eye on quantum cryptography
JSB Software has established itself as one of the top three companies worldwide in the burgeoning corporate internet access control sector. They are benefiting from the realisation by many corporates that non-business surfing by employees can have a huge negative effect on corporate productivity. JSB's softCONTROL product, with control lists and pass by technology, is far superior in obstructing access through deleted words on the search engine.
Pass by technology monitors those packets of data on the network and deletes access through the control list. Ultimately, JSB's software will be bundled with the firewall, virus detection and encryption technologies for virtual private networks. This could lead to corporate activity as these services merge into one software supplier.
Easynet is becoming a leading corporate provider through targeting medium and smaller companies and by way of geographic
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