InformationWeek

February 14, 2000

Secret CIO:
Merging Clicks And Bricks
The smart E-business entrepreneur should use stock-market equity to buy old-fashioned businesses that actually make money

By Herbert W. Lovelace

Herbert W. Lovelace he office investors were abuzz with the news about America Online's proposed acquisition of Time Warner. Crawford Huggins, our VP of public affairs, bemoaned his misjudgment in not buying AOL stock a year or so ago and solicited my opinion as to whether it was too late. Wendy Matthews, director of computer procurement for our group, asked me if I thought it was a good idea to put some of her money into AOL before everyone lapped up the shares of the new content/distribution/entertainment/software venture.

As much as I would like to be viewed as an Internet guru, I had to admit to Crawford and Wendy that I didn't have a clue how the stock market would perform. I do, however, have some opinions on where this frenetic wave of acquisitions and mergers is going.

I remember Alfie, a movie from the 1960s (whose tagline, "What's it all about?" was made famous by Dionne Warwick's version of the title song) that tried to make sense of a man's dysfunctional life. While it would be impolite and incorrect to consider Steve Case or Gerald Levin as anything but very smart businessmen, the company they're cobbling together may border on the dysfunctional. Certainly, the stock market has initially seen the merger as good reason to lower both companies' valuations. And perhaps the market really is beginning to understand just what it's all about-and whether it is functionally impaired.

The Internet is changing the way we live and work; there's no question about that. But do these online businesses deserve their exorbitant price multiples? I never understood how a Web site such as Amazon.com, which loses money continuously, could be worth several times the combined value of Barnes & Noble and Borders. And though I think it's great that Amazon CEO Jeff Bezos now has a cyber-community where he can sell everything under the sun, he still isn't making money.

Likewise, I never expected AOL-which I view as a so-so Internet service provider with what I'm told are hot chat rooms-to do so well. But it has occurred to me recently that I may have been missing the real pattern of success that could well be emerging for the majority of dot-coms.

Suppose the business world of the future has a limited number of pure online services such as auctions and "no-touch" sites (for making travel arrangements, shopping for a mortgage, etc.), and a lot of business-to-business stuff that cuts costs and administrative mistakes.

In this scenario, the rest of the business community uses fully integrated technology as a normal, natural part of its enterprise. The Internet morphs into another essential, invaluable tool like the telephone to reach customers and satisfy their desires. Clicks and bricks triumphs and becomes the dominant business model.

In this new society, you might buy something on the Web and have it sent to your house, or decide to pick it up at the local store. Or perhaps you examine a product (even your next car) at a display center, order it to be delivered to your house, and track its shipping on the Net.

Under this version of the clicks-and-bricks scenario, the smart E-businessperson would use some of that equity from the friendly stock market to buy a few of those old-fashioned businesses that actually make money but may not have the wherewithal to go where the future is heading.

If that's the case, perhaps Bezos should set his sights on Borders, or maybe Circuit City. Sure, stock prices may suffer without the glamour of pure Internet plays, but investors' money will have flowed to people who know how to build new-wave enterprises and sustain them. And that's the beauty of capitalism.

Note to readers: I am planning to put my InformationWeek columns into a book, with some additional commentary on the events and people about whom I write. If readers would like to be updated on this event, please drop me an E-mail with the word "book" as the subject line.

Herbert W. Lovelace shares his experiences (changing most names, including his own, to protect the guilty) as CIO of a multibillion-dollar international company. Send him E-mail at lovelace@home.com, and read his online column, "Ask The Secret CIO", where he will provide real--and sometimes whimsical--answers to your questions.

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