To paraphrase Clayton Christensen's "The law of conservation of attractive profits":

"When attractive profits disappear at one stage in the value chain because a product becomes modular and commoditized, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage. That is, the location in the value chain where attractive profits can be earned shifts in a predictable way over time."

Companies make attractive money when they solve the hardest problems.

Read his book, "Seeing What's Next"

Also: http://eser.org/oil-and-gas/The_law_of_conservation_of_attra...

Just because it's true that many internet businesses have become modular, commoditized, and marginally profitable, does not mean that there is a shortage of difficult and highly valuable problems to solve.

The companies the author listed are "component manufacturers". Future profits will be created by combining those components in creative ways to solve new problems.

Quoting Economist Paul Romer: “Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable." see: http://eser.org/oil-and-gas/Eser_Corporation%27s_Business_Ph...

Does this still apply if the attractive profits were never there to begin with?

Some companies have made a lot of money on the internet.

A small handful have made a fortune by monopolizing key markets but web sites in general are not profitable and profit never seems to be much of a concern for those investing in the internet.

I expected better from the WSJ. Even if what the author says is true, he supports his assertion with blanket statements and anecdotes.

Why did you expect better from WSJ? Most of the time they are horrible.

Really? I've found them to be better than the vast majority of publications. But, I guess you could argue that's being the best of the worst.

Have to agree with you. If this guy can't do his homework and realize just why AOL and Myspace are sinking ships, then he shouldn't be writing for the WSJ. Comparing all tech companies to those two is, of course, ridiculous.

This is why old media is sinking. It is not just about the old channels but old authors too.

In the same way I was disappointed by O'Reilly articles recently. Now when choosing to read an article I'm not looking the source (WSJ, Techcrunch, ...) but the author. (like Zed :). But foremost at article's HN comments

Old media's only currency is the rating thus they'll have to produce something sensational like this article. New media's currency is community credit and respect so we are producing knowledge

i think the author used to write for FT

Some problems with his argument: Time Warner may own AOL, but it also costs them heavily. Most of their network is Roadrunner/Earthlink before AOL as an ISP.

Microsoft is spending tons of money on online marketing to ensure that they're not a moot point. They are trying to make "Bing" valuable and thus their ad market valuable.

Myspace was pretty much doomed from the start. The underlying software was pretty shitty.

Cisco - what? +/- 10% is STEADY in this market. The market crashed and cisco went down. Duh?

I thought that after a bunch of stuff about investing in boring, conservative investments, the last line was hilarious:

"Next article: my favorite biotech plays."

Felt the same, like it's the most cliched investment ever.

Fred's response example of Google Maps really bothered me. I hate when Internet companies say "but if we wanted to make money we could advertise" Google Maps is not a recent product. Why aren't they advertising if its so easy for them to do? Wouldn't it be illogical for them to pass up revenue? the answer is that Google worries sticking ads throughout Google Maps may diminish the user experience -- which is why they can't decide to monetize on a whim.

I would expect VCs hear pitches all the time where entrepreneurs say that they haven't tried monetizing but easily can. And I imagine most of the time those pitches go in the garbage. So its interesting that Fred uses Google Maps as an example of how Internet companies can make money.

That's just stupid, internet startup costs are peanuts compared to any other market.

The problem, is that investors are used to investing huge amounts. So they end up investing millions into an idea that could have gotten off the ground with a few hundred K.

He's talking about "the internet" as the companies that built the physical infrastructure of the internet. That is largely in place now and is a steady, mature business, not a high flying investment opportunity.

Instead he suggests highway building companies. Several car manufacturers just went broke. I suspect highways are not the hottest thing on the planet anymore.

If prices reflect this already --- or especially if they have over-reacted, it might a good opportunity to buy anyway.

Couldn't you say that about anything?

Of course. I just wanted to point out, that it's not only the state of an industry that determines if it's investment-worthy. But also the price of assets.