Category: Globe and Mail

If Judge Marilyn Patel – the U.S. District Court judge who handed down an injunction yesterday against the music-swapping service Napster – knows her ancient history, she might remember the story of King Canute, who tried to stop the tide from coming in during his reign a thousand years ago. He failed, of course, and so will the Recording Industry Association of America, which is doing its best to turn back the digital tide.

Judge Patel said Wednesday that Napster infringes on music copyright by allowing people to download digitally encoded songs in the MP3 format from other individuals over the Internet, and the judge accepted the music industry’s argument that billions of dollars in royalties and other fees are at stake if Napster isn’t shut down immediately. Even though there hasn’t been a trial, the company is effectively prevented from operating.

Lawyers for the music industry said that while other products such as the VCR and the cassette tape recorder (not to mention the recordable CD) allow consumers to reproduce and share music and other copyrighted materials, Napster is different because it is not a device but a for-profit service. A similar argument was used recently to shut down RecordTV.com, which allowed users to “record” TV shows over the Internet.

The judge also accepted the argument that Napster is more dangerous than devices such as a VCR because it is so all-encompassing – that is, it can distribute copies of songs to thousands of users around the globe in minutes. In a way, Napster’s own success (it claims to have over 20 million registered users) has been part of its downfall.

The judge’s ruling may have all kinds of legal merit, just as King Canute’s attempt to stop the tide probably did, but that doesn’t mean it has a hope of changing the behaviour it describes – because in order to do so, Judge Patel would have to uninvent the Internet. File-sharing and data swapping of various kinds, legal or illegal, is what the Internet is about, and that is a tide that all the courts in the world can’t change.

When the VCR first appeared on the scene in the 1970s, the movie industry was terrified of this new technology. After all, it allowed TV watchers to record movies and watch them whenever they wanted to, and even make copies for their friends. The movie business went after the first VCR company – Sony, the inventor of Betamax – in a legal case that Napster’s lawyers have tried to use as part of their defence (with little effect).

Did the VCR kill movies? Not at all. In fact, there are hundreds of terrible movies released every year that would never even approach profitability if it weren’t for the VCR, because the industry found a way of making videotapes attractive enough and easy enough – and cheap enough – so that people would rent them. Do people still copy movies illegally? Yes, but the industry makes enough money on the rest to compensate for it.

Likewise, the music business would be a lot better off if it stopped listening to multimillionaire corporate rockers like Metallica and found a way of working with this technology instead of trying to stop the tide. Has the industry got this message? No. Look at what music giant EMI did recently: It announced that it will offer songs for download from its Web site, but buying a CD worth of songs will cost almost exactly the same as if you went to a store and bought one the regular way.

Does this make any kind of sense? Only if you are paranoid about protecting your existing profit margins, which on CD sales are up in the stratosphere somewhere. In fact, federal trade regulators in the United States recently ruled that the music industry has overcharged CD buyers by half a billion dollars over the past seven years. Is it any wonder that music lovers have tried to find other ways of getting the songs they want?

And if Napster is shut down, they will find other methods. There are services such as Freenet and Gnutella that would be even harder to police than Napster: neither uses company-operated servers, the way Napster does, making it harder – perhaps even impossible – to track those swapping songs. Other services offer total user anonymity. And Internet users can already find almost any digital file, song or software, even movies, offered free through a variety of services such as IRC (Internet relay chat).

In other words, shutting down Napster is like cutting one head off a multiheaded monster. The industry should think about finding a way to use the Internet, instead of trying to get someone to uninvent it.

I have to say, it sure was nice of Calgary to put on such a fancy going-away party. A couple of free drinks and a Stampede cowboy hat would have been fine — the city didn’t have to go and invite all those 2,500 people from places like Norway and the Middle East. On the other hand, maybe some of them came for something else. I thanked a few foreign-looking gentlemen for coming to see me off, and they didn’t seem to have any idea what I was talking about.

As fate would have it, the end of the World Petroleum Congress just happens to coincide with my departure from Calgary, after almost four years of covering business in Western Canada. Although it was a bit of a washout if you were hoping for a big pepper-spray type of protest, this global event is as good a note as any to depart on — even after you strip away the hype, hosting a show like the WPC is a major coup for Calgary, and also a pat on the back for an increasingly international oil industry.

I can’t stick around for the Stampede, unfortunately, so I won’t be able to see who some of the new names are sponsoring in the chuckwagon races, a staple of corporate sponsorship. Over the past few years this became a game in which the contestants tried to guess whose company would still be around the following year, after all the usual takeovers and mergers. Hurricane Hydrocarbons and Fracmaster Canada are just two of the companies that seemed to go downhill as soon as their name went on the wagon.

Lots of other companies have faded into the sunset one way or another in the past few years: giant companies like Nova Corp., Conwest Exploration, Wascana Energy and Norcen Energy; medium-sized players such as Stampeder Explorations, CS Resources, Elan Energy, Morrison Petroleums and Amber Energy, as well as dozens of smaller firms. Others are either on their way out or doing their best to avoid being swallowed up, including firms such as Ranger Oil, Renaissance Energy and Gulf Canada Resources.

Many of the industry’s larger-than-life personalities have also departed. Anderson Exploration CEO J.C. Anderson is about the most colourful guy left in the oil patch, next to Scottish scrapper Bob Lamond, who keeps an eye on the scene from his stone castle in Mount Royal. Former Gulf Canada CEO and Texas gunslinger J.P. Bryan has been and gone, unable to get the industry to agree that $6 of debt for every dollar of cash flow is a good thing. The woman who helped resurrect Suncor, Dee Parkinson-Marcoux, has also moved on, as has Greg Noval of Canadian 88 Energy.

And yet, while many Alberta companies have been gobbled up by U.S. giants, others are becoming giants themselves. Take Murray Edwards: Yesterday’s $1-billion bid for Ranger by Canadian Natural Resources makes it obvious that he plans to continue expanding his empire. In the past year or so, Canadian Natural has spent about $2.5-billion buying assets from various companies, and is on its way to being a major force — despite the fact that, if they saw a picture of him, 90 per cent of Calgarians would think Mr. Edwards was the guy who bags their groceries at Safeway.

Alberta Energy CEO Gwyn Morgan is no slouch in the corporate acquisition game either, having pushed the former provincial Crown corporation to the forefront of the natural gas business both nationally and internationally, and Jim Buckee has turned Talisman Energy into another major international player. Suncor has also become an industry stalwart, thanks to CEO Rick George and his drive to make the oil sands game more efficient — his example has helped convince others the oil sands can be a good business.

The oil and gas industry got ignored to some extent over the past couple of years, a result of low oil prices and a frenzy of interest in technology and Internet stocks, but there is still plenty of action to be had. Oil prices are higher than they have been in almost 30 years, and no one is too sure where they will stop, or when — and Alberta natural gas prices are higher than they have been since the industry was deregulated 15 years ago, helping to drive offshore development and convincing dozens of companies to take another look at the resources of the far North.

I may be leaving Calgary, but I hope to continue writing about those kinds of issues and ideas — and lots of others as well — in my new job: writing for The Globe and Mail’s new real-time Web site at http://www.globeandmail.com . And if you happen to be coming East some time, bring me a steak and a bag of those mini-doughnuts from the midway at Stampede Park.

Unless you’ve been living under a rock for the past few months, you’ve probably heard about something called Napster — which, depending on whom you listen to, is either an abomination used by criminals or a tool that has freed music from the clutches of evil record companies. The fact that such a tiny piece of software can generate these kinds of wildly divergent opinions suggests something significant is going on.

Napster is a small “freeware” program that can be downloaded from the Internet in about 15 minutes. Perhaps because its inventor is a 19-year-old college student named Shawn Fanning (whose curly hair led to the nickname “Napster”), the software doesn’t have all that many bells and whistles, but it is fairly easy to use, and does what it does very efficiently.

What Napster does is allow anyone on the face of the planet to connect to thousands of other users and trade digital music, or MP3 files. That’s all it does — but that’s enough to make it Enemy No. 1 for the recording industry. The entire might of the U.S. music business has come down on Napster like one of those two-ton weights in a Road Runner cartoon.

The Recording Industry Association of America is currently suing the company, arguing that its service breaches copyright laws, and several prominent artists — including the band Metallica — say it facilitates piracy. Metallica got a lot of press recently when it produced a list of 350,000 names of Napster users it claimed were trading songs illegally.

The company promptly banned those users, even though it admitted it would be relatively easy for users to sign onto Napster with a pseudonym — which may help to explain Napster’s claim that it has more than nine million users, a figure that is growing at a rate of 10 per cent a day.

One of the interesting things about Napster is that — despite all the furore surrounding it, and the recent dramatic selloff in technology stocks — the company seems to have had no trouble getting funding from venture capitalists. Not only did the well-known firm of Hummer Winblad invest $15-million (U.S.) in the currently non-public company, but also one of the firm’s senior partners, Hank Berry, recently became Napster’s interim CEO.

The fact that such a firm would be interested in a tiny startup is even further evidence that something big is going on — and it’s more than just Napster, which is part of the reason critics like Metallica and the recording industry are missing the boat. For one thing, there are already half a dozen programs available that do the same thing, and more.

A little program called Wrapster, for example, allows Napster users to disguise any kind of digital file as an MP3 file and trade it through Napster’s servers. Gnutella allows users to trade software and other files by connecting to a rotating series of servers, as does a service called Scour.net, while something called Hotline allows any user to turn their own computer into a server and trade digital files of all kinds.

Napster is just one front in an all-out war that the music industry is waging with the Internet, a war in which the tide seems to be favouring the consumer. The arrival of the MP3 compression standard allowed users to download and trade songs for the first time, and the industry has been trying to come to grips with this new threat for almost two years. Record companies have tried to develop their own MP3-type standard that would prevent file-trading, but so far the effort has produced nothing but press releases.

The kind of legal challenges that have been launched against Napster and a Web site called http://www.MP3.com only serve to show how blinkered the industry is. Even if they are both crushed financially, the phenomenon that created them is not going to go away. Just as music fans have made bootleg audio tapes for decades, they will continue to trade MP3s because they can — and the sooner music companies embrace that, the better off they’ll be.

This doesn’t mean all music suddenly has to be free. All those Napster users spend hours searching for, trading and downloading files because to some extent they love music — and it’s worth a bet that some of them would probably pay for those songs, as long as they didn’t have to pay too much. The U.S. Federal Trade Commission, for example, recently ruled that consumers paid close to $500-million more than they should have for CDs in the past three years. That’s not the best way to appeal to your customers.

But what if, instead of paying $25 for a CD that has two songs you like, you could pay 99 cents each for the ones you want? Sites like http://www.emusic.com already offer this kind of service, but they can’t offer any of the really popular songs consumers want — and the few record companies planning to offer music for download are stuck on the idea of using standards that will prevent copying.

This effort is almost surely doomed. Similar attempts to control digital content — such as the DIVX variation on the DVD movie standard — have been spectacularly unsuccessful, and there’s no reason to think digital audio will be any different. Instead of hiring legions of copyright lawyers, the industry should spend its money coming up with some way of getting on board the MP3 train rather than trying to block it.

After all, those people trading MP3 files are the industry’s core market. Instead of suing them, record companies should be trying to figure out how to give them what they want.

Four years. That’s how long it has been since the U.S. government first went after Microsoft Corp. for anti-competitive behaviour. The case eventually led to the high-profile ruling by U.S. Judge Thomas Penfield Jackson this week that, in turn, sliced $80-billion or so off the company’s market value.

By Internet standards, four years is an awfully long time. Companies that have been around that long are considered old guard, if not has-beens. Firms that have been around for a decade are dinosaurs.

It’s difficult to see Microsoft as a dinosaur, since it is still a standard-bearer of the computer age.

To the U.S. Justice Department, Microsoft is still the 900-pound gorilla of technology — standing astride the industry like a colossus, using its massive market power and PC dominance to crush helpless companies in its iron grip.

But there is another Microsoft visible between the lines of Judge Jackson’s ruling: a vast company built on a relatively narrow line of products, looking at a future in which its business model has become largely irrelevant. Seen from this point of view, Microsoft’s behaviour — illegal or not — appears to be fuelled by one overwhelming force: fear.

Bill Gates started to feel that fear in 1995, after it had become obvious that Microsoft was missing the Internet boat, and he did his best to try to turn the immense company around with an internal memo titled “The Internet Tidal Wave.” That led to the actions Judge Jackson describes, including the attempt to take over the browser market from leader Netscape Communications Corp. (now owned by America Online Inc.).

As the judge points out, however, despite spending billions of dollars and giving its software away, Microsoft’s attempt never entirely succeeded: After almost five years, it has about 65 per cent of the browser market — a pretty skinny monopoly. And no one really seems to care much any more about which browser they use.

Harry Fenik, a vice-president at consulting firm Zona Research in Redwood City, Calif., told Wired News recently that when his company asked a question about browser preferences in a recent study, “the most consistent response we got was ‘I don’t care.’ “

In reality, the browser wars were just a sideshow, a pale reflection of the real attraction — the Internet itself. Microsoft may control the software used to access the Internet, but it still rules very little of what users see or do once they are there.

For example, despite spending billions and Mr. Gates’s threat to “bury” America Online, the Microsoft Network failed to halt AOL’s climb to supremacy in the on-line service market.

What kind of industry titan lets that sort of thing to happen? The same kind that, despite years of trying, has yet to dominate the market for the server software that powers high-traffic Web sites. Free software from a company called Apache has more than 60 per cent of that market, with Microsoft a distant second.

Even worse, the jewel in Microsoft’s crown is in danger as the system that operates the computers used to roam the Net threatens to become less important.

Inside the Internet, “the platform, like Windows, is irrelevant,” Michael Sheridan, a vice-president at Novell Inc. in San Jose, Calif., told The Wall Street Journal. “We’d be crazy to discount them [Microsoft] but the world has changed.”

So far, Linux — the open-source software some see as a new threat to Windows — seems largely immune to Microsoft’s influence. And the combination of Linux with the emerging world of wireless, handheld, always-on and non-PC Internet devices could be Bill Gates’s worst nightmare.

This week, for example, AOL announced at the Internet World 2000 conference in Los Angeles that it plans to make a range of devices that provide access to the Internet. They include a unit for the kitchen and a tablet-style, handheld device — and both will operate using Linux. “The Windows era is dead,” wrote analyst Kevin Prigel of StreetAdvisor.com after the announcement. Dell Computer Corp. also recently said its Web site server PCs will now be available with Linux pre-installed.

Just as it has failed to crush AOL, Microsoft has also failed to extend its desktop dominance into the handheld and wireless markets. Despite hundreds of millions of dollars spent designing a smaller version of Windows (now called Pocket PC) for use on handheld organizers, Microsoft has so far been unable to take control of the market away from Palm Pilot.

Similarly, cellphone companies such as Nokia Corp. and Ericsson Inc. have formed a partnership to promote a standard for using a digital telephone as an Internet device, but there, too, Microsoft is trying hard to play catch-up.

Obviously, a company with Microsoft’s massive storehouse of cash and industry contacts isn’t out in the cold completely.

Its Microsoft Network services on the Internet get a fair bit of traffic, coming in third behind Yahoo and AOL; it has a couple of wireless partnerships; and it has its own plans for a tablet-style device like the one AOL announced. It also continues to push WebTV, although its $425-million investment hasn’t really paid off.

Microsoft’s biggest foot in the door of the high-speed Internet era is probably its investment in AT & T Corp. and its cable operations.

But analysts say Microsoft’s nightmare scenario could soon come to pass: people connecting to the Internet through their handheld, pager, tablet, kitchen appliance or phone — none of which use Windows or any variation of it — and surfing Web sites powered by Apache and Linux.

The closest these surfers of the near future would get to Microsoft is when they collect their free Hotmail or drop by the CarPoint or Expedia Web sites.

And what if they want to use a word processor or spreadsheet?

Instead of dropping $300 for a piece of software they need once a month, they could seek out one of the new “application service providers” that offer, for a modest fee, remote access to such software.

Sleep tight, Bill. Mathew Ingram is The Globe and Mail’s Western business columnist and a confirmed agnostic on computer operating systems.

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.

If that helpful neighbour in the movie The Graduate were to whisper one word to the young hero today, it would probably be “fibre” instead of “plastics.” Not the kind of fibre you get in cereal, but the kind that is made from spun glass and buried in the ground — optical fibre, the kind every telecom and computer networking company wants a piece of, so they can beam Internet data, voice and digital TV around the globe at high speed.

Every few days there seems to be another fibre-related deal: JDS Uniphase, for example, said last week that it is merging with fellow fibre company E-Tek Dynamics of San Jose, Calif., in a $15-billion (U.S.) deal. JDS Uniphase — itself a product of the $6-billion merger of Ottawa’s JDS Fitel with Uniphase Corp. just a year ago — is already one of the largest fibre-equipment companies, and well on its way to becoming what analysts call the Intel of fibre (referring to Intel’s dominance of the computer chip market).

The comparison with Intel could be apt. Just as the battleground of the past was the personal computer — a war Intel and Microsoft have won — some industry watchers feel that the battle of the future will be over who has the biggest and fastest and most agile network, able to offer the best route for high-speed, intelligent Internet traffic, voice and digital entertainment. Companies such as JDS Uniphase won’t have their names on the product, but like Intel, they will be providing the underlying firepower.

Another company trying to marshall its artillery is Nortel Networks. Using its high-flying stock, Nortel has been buying its way into the business: Last month, it paid $3.2-billion for Qtera Systems, whose technology boosts the carrying power of fibre. Its competitors aren’t standing still, mind you: In August, Cisco Systems paid $7-billion for an optical startup called Cerent, and Lucent Technologies paid $1-billion for Nexabit, a company with no sales.

Nortel and its larger cousins also have to move fast because some of the industry’s small fry are growing so quickly that they are pricing themselves out of reach even for the big guns. A small fibre-optic company called Sycamore Networks now has a market value of more than $23-billion, while the formerly unknown Redback Networks has grown to the point where it is now making billion-dollar acquisitions — such as last month’s $4.3-billion purchase of Siera Corp., a fibre-equipment company with no revenue.

Another Canadian company trying to position itself at the forefront of this industry is little-known Worldwide Fiber Inc. of Vancouver, a privately held unit of a construction company called Ledcor Industries. Worldwide Fiber became a lot less unknown earlier this year, when it said it had convinced Microsoft’s chief financial officer, Greg Maffei, to join the company as CEO. This was a fairly major coup — like an unknown bar band convincing Keith Richards of The Rolling Stones to join the group as lead guitarist.

What helped Mr. Maffei make the decision was revealed last week: He got a loan of $77-million from Worldwide Fiber to buy 31 million shares of the company, which has said it will file later this year for an initial public offering. But despite the inducement, the fact is that a senior executive of the world’s most valuable company decided to join an unknown in Vancouver.

Worldwide Fiber is currently in a race to wire the globe with fibre-optic cable. The company, which began laying cable as an offshoot of its construction work, has bundles of fibre — each strand of which can carry 320 gigabits, or the equivalent of 5.7 million Internet connections — stretching across the country, and is halfway through a similar network in the United States. It is also building an undersea cable to join North America and Europe, and recently acquired fibre linking 11 European cities.

The Vancouver company isn’t alone: Its strategy is similar to that of a U.S.-based company called Global Crossing, which turned an undersea fibre cable into a multibillion-dollar market valuation — allowing it to make a $35-billion offer for US West (it lost out to a higher bid from Qwest Communications). Tyco International, the U.S. company that is laying the undersea cable for Worldwide Fiber, also recently announced that it plans to lay its own fibre network at the same time and go into the networking business.

Cementing the impression of fibre as the pipeline business of the future, U.S. energy giant Enron — which made its name with old-fashioned gas pipelines — also has a sizeable fibre-optic network it acquired when it bought a regional utility. The company rents it out to other companies, and says it is developing a trading network that will allow companies to buy and sell capacity on fibre-optic networks the same way companies trade capacity on natural gas pipelines. One of its first customers: Global Crossing.

If you want to build an information superhighway, you’ve got to have a road — and fibre, it seems, is the road-building material of choice.