Taking Stock / Return of the Internet and That Murdoch Touch

Murdoch is hot for Internet again. Uh oh. That might mean it's time to dump Internet stocks. Short Google, short eBay, short Yahoo! Run for your life! The last time Rupert Murdoch started slavering at Internet stocks was about 3.5 seconds before the huge crash. Murdoch, who had forgone Internet adventures throughout 1999, stormed the market in 2000, saw his investments wiped out in 2001 and fled the market he'd just joined, which had burned media companies to a crisp.

The Financial Times reported this week that Murdoch, owner of News Corporation, again summoned his managers to an urgent jaw-fest to discuss preparing for the Internet era. The last time Murdoch summoned his managers for such a meeting was in the summer of 2001, at a Las Vegas hotel. He showed up brandishing a big ax and chopped down all the Internet division chiefs he'd appointed the year before. But Internet is hot again, dot.coms are the talk of the town, entrepreneurs smell opportunity and CEOs are wondering, is it for real this time? What should we do?

What they should do is learn from history. No, not from the dot.com bubble of 2000, but from the history of the 100 years preceding it, the stories of the sectors in which new "disruptive innovations" changed the rules of the game. Internet definitely falls into the category of "disruptive innovations," especially, but not only, for the media business. And it is changing the rules of the game. In his books "The Innovator's Dilemma" and "The Innovator's Solution," Prof. Clay Christensen wrote that most companies in sectors undergoing "innovation attacks" of this sort cope in one of two ways.

(1) They ignore the change, figuring the new market is a passing fad.

(2) They rush into the new market, but try to replicate their usual patterns of behavior into it.

History is strewn with the corpses of companies that made these mistakes, Christensen said. And it will happen again this time, probably.

Internet, the destroyer

Companies need to understand that innovations like Internet impact in two main stages. First the innovation creates a new market with new products that address a new population. In the case of Internet, most of the world's newspapers simply tried to copy their behavior to the new medium, and they failed. The success stories were the innovators like Yahoo! and eBay, which created wholly new services and addressed a new audience, not the traditional users of media services.

In many ways, we are still in the throes of that first phase. New companies are popping up by the thousands, delivering new services to new audiences.

In the second stage, the innovative technology starts to enter the mass market, chewing up both old and new businesses. This happens when the technology starts to mature, when the quality of the products and services it offers becomes significantly improved, and when the broad population starts to adopt it.

The first stage is far from over - Internet will be inspiring new businesses and services that nobody's thought of yet for years to come. But in many ways, the second stage has already begun. Internet is already eroding market forces and business models in veteran markets.

Before falling in love with dot.coms, Murdoch once said that the Internet would destroy more value than it would create. He was right, in part. The Internet will destroy a lot of value for existing companies. But it will create tremendous value for billions of people. True, it is not the kind of value that people like Murdoch appreciate, because it doesn't appear on their profit and loss statements. But it's tremendous in scope, and will affect the entire world of business.

There will also be companies that create Murdochian values, other Googles and eBays and Yahoo!s, new companies that offer new services to new buyers. But going by history, chances are Murdoch and his fellow global managers won't be in control of these companies. Innovation and revolution are not the forte of the great business empires.