Month: February 2000

Like many other technology-related developments, including the Internet itself, the “Internet incubator” phenomenon took root in the United States and has only recently started to catch on in Canada. But now a handful of home-grown companies are doing their best to make up for lost time, hoping to duplicate the kind of multibillion-dollar home runs that dot-com incubators south of the border have racked up in the past few years.

The Michael Jordan of this business — the one that more-recent firms look at with awe — is CMGI Corp. of Massachusetts. Founder David Weatherall has built a company with a market value of more than $25-billion (U.S.) by investing in Internet startups, some of which have become wildly successful. For example, after spending about $6-million on GeoCities, which it helped set up in 1996, CMGI made $1-billion when Yahoo bought it last year.

In 1995, the company bought 80 per cent of a search engine called Lycos for $2-million. Its 17-per-cent stake is now worth about $1-billion. NaviSite, a Web-hosting company CMGI started, went public in December at $14 and has been as high as $161 — CMGI owns 72 per cent, worth $2.7-billion. The company has used its high-flying stock to buy even more companies. It bought Web portal AltaVista for $2.3-billion and on-line ad firm Flycast for $700-million, and more recently snapped up auction site uBid.com for $400-million and e-commerce company Tallan Inc. for almost $1-billion.

Some critics, however, say CMGI’s strategy is a risky one. 3Com Corp. founder Bob Metcalfe told Business Week that “CMGI is using highly inflated stock to buy stocks that are highly inflated. . . . They’re playing with fire.” And not all incubators have CMGI’s success. idealab, run by software pioneer Bill Gross, has had fliers like GoTo.com and MP3.com, but has also seen one of its holdings — EToys — plummet to $14 from $86 and watched another, FreePC, fail to fly and eventually merge with PC maker eMachines.

That hasn’t stopped Canadian companies from jumping into this emerging industry, however. The local players include three public ones: Itemus Corp., recently emerged from the ashes of a junior mining company called Vengold; EcomPark, run by a former Yorkton Securities executive; and Exclamation Inc. There are also several funds, including Brightspark, run by Mark Skapinker and Tony Davis, founders of former fax software firm Delrina Corp.; XDL Intervest, run by Delrina founder Dennis Bennie and Second Cup founder Michael Bregman; Mosaic Ventures; and J. L. Albright.

A more recent addition to the club came from a surprising quarter. Counsel Corp., the former nursing home and pharmaceutical company owner, has built up a sizeable portfolio of Internet-based companies in the past six months or so. Counsel was an early investor (as was XDL Intervest) in Delano Technology, a provider of e-business software that went public earlier this month on the Nasdaq market. Delano started at $18 a share and zoomed as high as $50, which made Counsel’s stake worth $45-million.

Including Delano, Counsel has spent more than $45-million on technology investments since last November. Its portfolio now includes 42 per cent of VoCall Communications Corp., a telecommunications provider based in New Jersey; 40 per cent of Proscape Technologies, which sells corporate sales and marketing software; 33 per cent of New Jersey-based Impower Inc., an Internet marketing services company; and 4.6 per cent of Toronto-based Hip Interactive Corp., which sells software and video games over the Internet.

Mosaic Ventures has had a couple of success stories, including a company called Direct Hit, which Mosaic founder Vernon Lobo invested in early on, using financing from high net-worth investors such as the Chagnon family (owners of Groupe Vidéotron) and the Bronfman family.

Mosaic made a windfall profit when Direct Hit, an Internet-search technology company, was bought by search engine operator AskJeeves Inc. for $527-million last month. Mosaic put about $2-million into Direct Hit, a stake now worth more than $50-million. Mosaic also owns a stake in a U.S.-based company called Zefer Corp., which is expected to go public soon. In less than a year, from mid-1998 to 1999, Zefer went from being a Harvard MBA assignment to raising $100-million in funding, the largest such financing ever.

One of the earliest investments by J. L. Albright, run by a former investment banker and two partners, was a networking company called Isolation Systems, which was eventually sold to Shiva Corp. in 1998 for $50-million. Albright also had a stake in Inex Corp, an e-commerce firm it sold to Infospace.com for $37-million last year, and it has financed digital broadcasting company PixStream and on-line retailer GroceryGateway.com.

Exclamation Inc. was set up by the founder of website-design company CyberPlex, and its current stable of investments includes San Francisco-based Bigtree.com, an on-line office products company; Vancouver’s ThinApse Corp., which rents software on-line; an on-line gaming company called Exponential Entertainment, and Points.com, which is trying to create an Internet “portal” for loyalty-reward programs such as Air Miles. Exclamation went public on the Canadian Venture Exchange earlier this month.

Itemus, meanwhile, only just launched itself as an incubator, using the management expertise of former Hummingbird Communications executive Jim Tobin and Anthony Iantorno, a former staffer with CMGI Corp — but it says it has more than $125-million (Canadian) available that it’s willing to spend. Judging by the number of firms already chasing the dot-com boom, it looks as though the Internet startup business in Canada is heating up.

Anyone who pays attention to the junior stock sector knows that penny mining companies have been transforming themselves into Internet and technology plays at a furious rate over the past year. What started as a trickle about a year ago soon became a flood, and it shows no signs of stopping, with new entrants in the Internet gold rush every day. The conventional wisdom is that this is some kind of dangerous, mass hysteria. But is it?

Arguably the first to start down this dot-com Yellow Brick Road was American Gem Corp., which used to be a sapphire mining venture listed on the Vancouver Stock Exchange. Last spring, it announced it was getting into the Internet business. It said it would sell sapphires on-line, and also planned to buy a brokerage firm and start an on-line stock-trading operation. The company recently changed its name to Digital Gem Corp.

After making its initial announcement, shares of American Gem soared from a low of about 4 cents to more than a dollar in less than a month — and all across the country, you could almost hear the sound of mouths dropping open, as chief executives of other junior miners sat in their offices watching in shock and disbelief. Soon, other companies joined the fray.

Sikaman Gold bought an on-line shopping mall called NorstarMall.ca and the stock has climbed as high as $1 from 20 cents; LatinGold became an Internet travel network called Travelbyus.com and the stock has gone as high as $5.50 from 6 cents; Sheffield Resources became Globalstore.com Inc. and saw its stock go as high as $2 from 22 cents; Gleneagles Petroleum turned into ClickHouse.com and its shares went to $1.60 from 12 cents; Goanna Resources changed its name to Intelliworx International and the stock went to $15 (U.S.) from $5 on the U.S. over-the-counter market; and the list goes on.

This isn’t only a Canadian phenomenon, either: The penny stock sector in Australia has seen the same flight to the Internet. Last year, Golden Hills Mining became Davnet, a data communications company; Mogul Mining became an Internet-based wine distributor; Ramsgate Resources got into Website design; Walhalla Mining turned into a company called Kidz.net; and Western Minerals became an on-line sex toys retailer called Adultshop.com.

The process continues: Vengold Resources of Vancouver recently became an Internet “incubator” called Itemus, and the stock has rocketed skyward; Rocca Resources says it is going to sell Internet privacy software in Asia; and William Resources has traded more than 10 million shares a day for a week, just for saying it is thinking about an Internet investment. But the best example is probably Victory Ventures, previously known as the defunct mining company Bagagem Diamonds and Slumbermatic Bed Co. It now owns a site called investment.com, where people can read about the latest hot stock.

The rationale for this lemming-like behaviour is obvious: American Gem’s stock climbed by 2,400 per cent after it moved into on-line stock trading; shares of LatinGold, now Travelbyus.com, have gone up by about 9,000 per cent in the past year; in Australia, shares of Adultshop.com climbed by more than 7,000 per cent last year to $1.72 Australian ($1.56 Canadian) from just 2.4 cents (Australian) after it moved into the on-line sex toy business. Junior mining stocks haven’t seen that kind of movement since Bre-X torpedoed the entire sector two years ago.

Legendary Vancouver mining promoter Murray Pezim put his finger on this phenomenon when he reportedly said: “If people want red hats, you sell them red hats. If you have blue hats, then you paint them red.” Capital flows like water: It finds its own level, and it seeks the easiest route between two points — and right now, the easiest route is the Internet. The CEO of a defunct mining company wouldn’t be doing his fiduciary duty if he kept digging for shiny rocks instead of getting on the Internet.

Market watchers who get steamed up about about this shift are missing the point. Sure, it’s senseless to think some tiny little company whose CEO used to sell insurance could suddenly produce wealth just because he puts a “dot-com” at the end of its name. But is it any sillier to think that a group of yobbos in an industrial park could produce wealth by digging a bunch of holes in the ground in Central America? Investors in junior mining stocks are used to risks that make Internet stocks look like T-bills.

Thousands of companies have raised money from gullible widows and German pension funds and Swedish millionaires, and then blown every cent and more hauling drill rigs to Russia or sifting through dirt somewhere in the Amazon. How is trying to set up an Internet travel network any riskier than that? And even if it is, if that’s where investors want to put their gambling money right now, who are we to tell them they shouldn’t?

There’s an old joke about the business manager for a retail company who admits his company is losing money on every unit it sells, but insists he can “make it up on volume.” This isn’t really a joke any more — in fact, it’s the business model for any number of Internet companies. The latest twist to this “give away the store” model comes from a group of companies hoping to prosper by providing Internet access for free.

The company that has made the biggest splash is NetZero, based in Westlake Village, Calif. It went public last September and almost instantly had a market value of about $3-billion (U.S.) when its stock climbed to $30. At that point, its market value was almost the same as the second- and third-largest Internet service providers (ISPs) in the United States — Earthlink and Mindspring — combined.

That’s not bad for a company that gives away its major product, and lost $40-million on revenue of $20-million in six months last year. The thing that really drew the market’s attention, however, was the rate at which NetZero was signing up users: more than 1.7 million in 1999, making it the third-largest ISP in the United States. It has since jumped into second place nationally with three million subscribers, behind America Online’s 20 million users.

NetZero’s stock has fallen back from its early highs. After getting up to $40, it has dropped below $30, although that still gives it a market value of about $2.8-billion. The company recently got a major boost when it said it had signed a deal with General Motors to link subscribers directly to the car maker’s on-line buying site — a deal that could provide NetZero with about $100-million in revenue in the next four years.

The other free Net access company that has steamed up the stock pages is Juno Online,which saw its share price soar more than 130 per cent on a single day in December, after it said it would offer free Internet access. The stock got as high as $80 before plummeting to $25, which still gives the company a value of $1-billion. Juno, which started as a free e-mail company, lost $55-million on revenue of $50-million last year.

Both stocks have stopped their climb up the charts in part because industry watchers still have doubts about whether free access can be a viable business. Providers such as NetZero and Juno make their money using banners that bombard users with ads, and can’t be stopped — though hackers have apparently broken NetZero’s system, and some users have an old-fashioned method of blocking the ads: strategically applied pieces of paper.

Free Internet access doesn’t really have a great track record in the United States or Canada: two companies that tried to make a go of it in the United States were FreePC — which gave away entire computers as well as Net access — and Bigger.net. The latter went bankrupt in 1997 after signing up 40,000 users, while FreePC was bought by discount PC maker eMachines, which ended the free Internet idea. In Canada, Cybersurf Corp. has tried to push the idea of free access but so far hasn’t made much headway.

There are free Internet providers in other countries, including Freeserve in Britain (owned by electronics chain Dixon Group PLC) and several companies in Brazil. However, the Internet market is a different beast in these countries: Users pay charges for all their phone calls, even local ones, and that has meant far lower rates of Internet usage. In other words, companies almost have to offer “free” access just to get people interested.

In the United States, companies such as NetZero and Juno face the problem of eating all the Internet access costs, and then paying for them solely by advertising — analysts say it costs ISPs about $6 a customer to get a telco to provide them with local calling numbers. And then there are those who question how much the advertising carried on such services is really worth — especially when research shows that barely half of NetZero’s three million users log on to the Internet in any given month.

In an interview with CBS Marketwatch, analyst Drake Johnstone of Davenport & Co. said if free-access companies can’t grow quickly, “they’ll be losing pots of money. . . . It’s like they’re running in front of a speeding bus and they hope they don’t trip and get run over. You hope the market is going to be supportive [but]it’s like playing with a loaded gun.”

The market is also getting crowded. AltaVista, the Web site owned by Internet holding company CMGI, is now offering free access, provided by another CMGI company called 1stup. The latter is also the engine behind ‘s free service, called FreeWorld, which the company says is designed so people can graduate to the company’s high-speed cable product.

Another recent example is Bluelight.com, a joint venture between Yahoo and K mart designed to get users on-line and then steer them in the direction of e-commerce sites.

This may be the future of free Internet access: a freebie provided by Wal-Mart, so you will come on-line and shop at their Web site, or offered by the phone company in return for a certain amount of long-distance activity or a package of other services. But the survival of stand-alone providers such as NetZero and Juno remains a big question mark. Readers can reach Mathew Ingram by fax at (403) 244-9809 or at

People seem compelled to believe certain things, regardless of the evidence to the contrary. For example, people insist that hospital emergency rooms fill up when there’s a full moon, even though research shows no such thing. Some people believe that the moon landing was faked. Others are convinced that gasoline prices are the product of a vast conspiracy, despite the fact that repeated investigations have found nothing of the kind.

The latest uproar takes its cue from the fact that gas prices at the pumps are on average higher than they have been since the Persian Gulf crisis in 1991. How much higher? About four-tenths of a cent. Try this little exercise: Think of any other commodity — one that you use daily and in large quantities — whose price you are aware of changing by a few tenths of a cent. Try to think of one where you even noticed a change of several cents.

Thanks to carefully controlled cartels involving such common household items as milk, cheese and eggs, you pay several times what it actually costs to produce those commodities — but no one boycotts the grocery store because the price of cheese went up by 200 per cent. Very few people can track the cent-by-cent changes in the price of bread and then correlate that with the world price for a bushel of spring wheat and conclude that they are being gouged, even though the Canadian Wheat Board has a monopoly that oil companies would never be capable of constructing in their wildest dreams.

So gas prices are as high as they were before war broke out in the Persian Gulf. And where is the price of crude oil at the moment? It’s north of $30 (U.S.) a barrel, which just happens to be right about where it was before war broke out in the Persian Gulf. That won’t satisfy the conspiracy theorists, however — who now include in their number the Premier of Ontario. A gaggle of Ontario MPs has been traversing the province holding hearings to get to the bottom of this crime against the driving public.

It would be a lot easier — not to mention cheaper — if these MPs just sat in a boardroom somewhere and looked at the stacks of paper that have been prepared on this issue over the years: six investigations by the Competition Bureau and its predecessor agency, and a series of inquiries by other provinces. Not a single one has found any evidence of conspiracy, including the most recent one, which released its report just two weeks ago.

In fact, several have said that by any conventional measure, gas retailing is among the most competitive businesses going. The key issue is not whether prices go up, or even whether they all go up at the same time — it’s whether they stay up. And they invariably don’t. But maybe a stable price would be preferable to all that up-and-down activity. Maybe the federal government could rebuild its stake in Petro-Canada and then help control the gas retailing industry that way — or even create a kind of Canada Gasoline Board that would set quotas and prices. Wouldn’t that be great?

Ask someone fuming at the pumps why they believe in a conspiracy and they will tell you several things: pump prices always go up faster and farther than they come down; they always go up on weekends and holidays; and they are higher than they have ever been. The first two of these things are often true — prices do tend to go up faster than they come down. All that shows is the desperation of oil companies, whose profit margins at the retail end of the chain are measured in pennies per barrel. So does the tendency to push prices up on summer holiday weekends, when you know people will be driving.

No one believes this, of course. How could they, when prices are so high? Most people can tell you how much they paid for gas 10 years ago or even 20 or 30 years ago, or how much their cousin in the United States pays for it. But can they tell you how much of that price is tax, or how much that tax component has risen in the past 10 or 20 or 30 years? Not likely. Could they tell you that — adjusted for the effect of inflation — gas prices are lower than they were 40 years ago, even after you include higher taxes? Probably not.

One more piece of ammo in the gas price conspiracy is the fact that gas stations all put their prices up at the same time. How obvious could it get? Cigarette-smoking figures in dimly lit boardrooms are clearly making a call on the secret phone (shaped like a gas pump), and telling everyone what the price is. Or, they could just be watching each other. “It is not against the law to watch what your competitors are doing and then match their price movements,” says deputy Competition Bureau commissioner Harold Chandler.

Oh sure — as if that’s going to explain it away. No one expects the government to find evidence of price fixing, do they? They’re probably all in on it too. And here’s another thing to think about next time you’re at the pumps: How come the price of gas always goes up when there’s a full moon?

Ted Rogers’ acquisition of Groupe Vidéotron Ltée for $6-billion or so makes it clear that the race for ownership of the information pipeline is heating up. Mr. Rogers and other cable companies see the coaxial cable snaking into most homes as the premier route for high-speed Internet access, phone service and digital TV. Telephone companies like Bell Canada, meanwhile, see advanced telecom technologies such as digital subscriber line (DSL) as the Holy Grail.

In some cases south of the border, companies are hedging their bets by buying into both sides of the issue: for example, last year telecom behemoth AT&T bought Tele-Communications Inc., one of the country’s biggest cable providers. Ma Bell also owns a stake in Excite@Home, which operates a high-speed cable service — a service that both Rogers Communications and Shaw Communications of Calgary license and offer over their own networks.

In the early days of high-speed Internet access, it was assumed that cable would dominate the market. Phone companies didn’t have a great track record with new technologies, being more focused on selling high-margin business lines. In the past year or so, however, companies in Canada and the United States have stepped up the pace of their high-speed offerings.

Although both sides like to get into heated arguments about whose service is a) faster and b) more reliable, most analysts agree that DSL (Digital Subscriber Line) and cable access will probably continue to co-exist. Some feel DSL will likely be adopted faster by businesses because they already have the phone lines, while cable has been accepted more quickly by consumers because most — especially in Canada — have cable at home.

When it comes to investing in this market, you’re probably better off staying away from the actual cable providers such as Rogers and Shaw and going after the so-called “plumbers” — the companies that make the cable modems and DSL routers and other equipment that Rogers and Shaw and other companies use. This market is rapidly becoming neither cable- nor telecom-centric but rather fusing into a single networking equipment market.

Many of the existing telecom equipment companies are involved, such as Lucent Technologies, Motorola and Nortel Networks. There are also younger players such as Juniper Networks — whose stock is up 460 per cent since last July — Sycamore Networks, Efficient Networks and Copper Mountain. The latter two specialize in DSL equipment, while the others are trying to become suppliers of choice for either fibre-optic or coaxial cable, or both.

When it comes to cable, Motorola and Nortel are two of the leading makers of older-style cable modems, along with General Instrument (now part of Motorola) and 3Com Corp. But they are not as big a factor when it comes to the newer modems, which can be used with any cable service, that are seen as the future of the industry. In that end of the market, the stars include two smaller and lesser-known companies: Com21 Inc. and Terayon Communication Systems.

Terayon has done deals with Rogers and Shaw, and as an incentive has given both an equity stake. Network equipment giant Cisco Systems also owns a stake. The explosive increase in Terayon’s stock price since it went public in 1998 — up more than 850 per cent to $140 (U.S.) — has helped boost Shaw’s results, because it sold shares last fall for a healthy profit.

Another fast-growing network equipment maker is Redback Networks,which went public last summer at $30 and has climbed more than 600 per cent. Redback recently bought a networking technology company called Siara Systems for $4.3-billion, even though Siara had no revenue whatsoever. Redback is building systems that can handle either cable or DSL, and speed up Internet traffic by sorting the bits of data and routing them more effectively.

Next Level Communications,a General Instrument spinoff, is selling technology in partnership with USWest that it says uses a variation of DSL to provide enough bandwidth for full-motion video broadcasts, as well as high-speed Internet access and telephone use, on a single copper phone line — although a user has to be no more than 3,000 feet from a phone company switch. Its shares have climbed to about $120 from about $50 last fall.

A California company called Jetstream Communications,meanwhile — which is expected to go public in the near future — says its equipment will allow users to have up to 16 virtual phone lines as well as high-speed Internet access using a single copper phone line. Its main competitors are a company called Accelerated Networks,also said to be planning an initial public offering (IPO) soon, and another privately-held equipment supplier called Coppercom.

While the big U.S. phone companies focus on selling DSL in large centres, there are a whole series of smaller companies that are focused on smaller areas. These companies — who install their own DSL equipment in the central switches belonging to the phone company and then lease phone lines — include Covad Communications (whose stock has climbed to $80 from less than $30 last year) and Northpoint Communications,as well as privately-held New Edge Networks,which is expected to do an IPO soon.