Non-viable Internet biz models may be to blame for recent st

Non-viable Internet biz models may be to blame for recent stock market free fall

Friday, April 14, witnessed the biggest decline since 1987's infamous Black Monday for the Dow Jones Industrial Average, with a drop of 617.78 points, or 5.7 percent, from 10,355.77. At the same time, the Nasdaq composite plunged 355.49 points, or 9.7 percent, to 3,321.29. Regardless of whether it is called a crash or a major market correction, the latest debacle had investors worldwide trembling with thoughts of coming aftershocks which would certainly come elsewhere.


Korea's markets, too, took historic tumbles on the next trading day, with the KSE composite index diving 11.6 percent and the KOSDAQ shedding 11.4 percent.


Although the markets around the world recovered somewhat in the ensuing days, jitters are still hanging in the air. There is consensus among market watchers that full recovery is not in the offing.


Is the New Economy a mirage?


There are several factors that caused the havoc. Since June of last year, the US Fed has raised interest rates five times by a quarter percentage point on each occasion. It is expected that another rate hike, as much as a half percentage point, will be coming in May.


On that fateful Friday the 14th, the US Labor Department had announced that March's consumer prices rose 0.7 percent. That news triggered concerns that the US' ten-year old prosperity with low inflation may no longer continue.


Another reason can be found in the fact that Microsoft's failure in the legal battles with the US Justice Department has sent negative signals for technology stocks in general. Famed Goldman Sachs analyst Abby Joseph Cohen's advice four weeks ago to reduce exposure in tech stocks also played a role in the decline.


Although it is reasonable to consider that all of these factors have been at work simultaneously to bring down the markets, there also may be a fundamental rethinking of the viability of so-called "dot-com" stocks which is a major factor behind all this.


Limits of existing Internet business models


At the center of the New Economy whose growth is led by progress in information technology, there lie innovative business models created by Internet and other IT ventures.


In the initial stage of the Internet boom, the most popular business model has been one of taking in advertising revenues while offering free services to the users. But it soon turned out the 'advertising model,' except for a select few super-successful ventures like Yahoo!, is inadequate to guarantee a steady stream of income in the long run.


The next business model that Silicon Valley figured out was e-commerce by which all brick-and-mortar transactions can be replaced. E-commerce is no doubt an idea that will change the way business is done and create a huge market within years. But there is no guarantee of profits in a short time span for companies involved in the business.


Maybe investors are suddenly awakening to the fact that it is earnings that should count, rather than the mere hope of potential earnings in the future that has been driving dot-com stocks to stratospheric heights for the last several years.


For e-commerce to become a truly profitable business model, it is imperative for the seller to have a close integration with manufacturers that produce tangible goods. After all, there must be something to buy and sell before putting into place a sophisticated system of transactions. And it takes time to implement such seamless integration, maybe it takes more time than anyone can imagine.


The most important challenge for the financial markets of the US and other regions including those of Korea is to get back to where they were, or should be. Where they should be is finding a viable business model for the New Economy that will not break easily in a stress test and that will give companies a stable income stream coming from selling goods or services, not ephemeral paper gains.