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2HRS2GO: The Net spending cycle never ends

So the Internet isn't much different from the real world.

Inktomi's (Nasdaq: INKT) third quarter beat the Street's numbers, but the company's expenses are also growing faster than some observers expected. Shares plunged as much as 15 percent today after Merrill Lynch's Henry Blodget downgraded the stock's intermediate term rating to "neutral" from "accumulate."

Blodget worries that Inktomi has to spend more than he expected for sales, marketing and product development. But Inktomi isn't the first Internet-related company to surprise investors with news of more expenses.

Have an opinion on this? (Nasdaq: AMZN) took a big hit July 22, the day after the company announced it would boost spending on warehouses. CNet (Nasdaq: CNET) got slammed July 1 when it unveiled plans for a $100 million marketing campaign. A $50 million plan for advertising sent Mindspring Enterprises (Nasdaq: MSPG) tumbling on July 27.

It's taken roughly five years of the commercial Internet to confirm what some people always suspected was a big lie, or at least a huge misconception: the Internet is cheaper.

E-business proponents tout the Internet as the ultimate expression of technology boosting efficiency. A global communications network provides easier distribution of information, leading to increased sales, lower costs, blah blah blah.

But it doesn't take away basic business requirements. You still need sales representatives. Smart advertising still beats word-of-mouth in most cases. Products still require constant research and upgrades, in many cases more than a physical world business equivalent, because everything moves faster on the Internet.

Speed -- the biggest difference between the Internet and real world dealings -- is turning out to be a drain rather than a gain. Online technology is available to everyone, so everyone buys it. Then you turn to marketing to get an edge, but your competitors are doing the same thing.

Inktomi CEO David Peterschmidt calls it a marathon. Mark Cuban, vice-president in charge of Yahoo! Broadcast Services, says it's a sprint. Either way, Internet companies are competing in races, where steroids and blood doping are legal, available and expensive.

And because everybody does it, no one has an advantage. You only win when someone drops out of the contest. If you're lucky, you get bought out, like But no one is going to buy an or even a mildly profitable operation like eBay (Nasdaq: EBAY), because their stock costs too much, and it's going to continue costing too much unless investors lose all faith. And if that happens, the Internet sector really has problems.

Ultimately, Internet costs of doing business look much those of the traditional corporate world, just with server and network expenses instead of printing presses, store rental space, or product packaging. And just like in the real world, Internet companies (Yahoo, AOL, for example) will win because they have smart, aggressive managers, as opposed to some mythical electronic edge.

Unfortunately, given the rate at which these companies continue to bleed money, maybe the Web doesn't resemble the Old World as much as the Third World. Internet companies take the role of countries and shareholders collectively play the International Monetary Federation. The market keeps trading their securities and occasionally doling out more money (in the form of secondary offerings and bond floats) to keep these operations afloat, in the hope they'll eventually repay their debts by producing mountains of earnings.

Sure, and maybe someday Russia will turn into a capitalist power. In the meantime, billions of dollars are gone. In the case of the Internet, those dollars come from people like you.

Other issues:

  • Ramp Networks
  • (Nasdaq: RAMP) Continuing along the same theme, this stock is plunging today following the company's report of third quarter results in line with expectations and ... well, we'll let Robertson Stephens analyst Paul Johnson say it. "Although we are not changing our revenue estimates for fiscal 1999 and 2000, we are lowering our earnings-per-share estimates substantially for fiscal 1999 and 2000," Johnson said today. "This change reflects the company's decision to accelerate its spending on sales and marketing, as well as research and development."

    The cycle never ends.

  • LM Ericsson
  • (Nasdaq: ERICY) Net income fell 16 percent year-over-year in the third quarter, but the wireless giant sees nothing but improvement next year. 22GO>