The Arithmetic of Value

challenge. They're not sure what it means. They're not sure what to do with it or about it. And every time they turn around, another executive from their interactive group is walking out the door and joining some startup company.

Which is why Disney, a high-flying growth stock in the 1980s, has been exiled to Wall Street's doghouse. Things have gotten so bad that Disney CEO Michael Eisner has taken to meeting with Wall Street analysts, whose social status in Hollywood falls somewhere between junkies and journalists. Try as he might, Eisner still can't convince analysts that Disney is a winning ticket. He can't convince them Disney has an Internet strategy because, truth be told, it doesn't.

The Disney story is emblematic of what is happening in American business today. There are two great divides opening up. One is the Digital Divide. The other is the Genomics (often referred to as biotechnology) Divide. Regardless of what business you are in, if you are on the wrong side of one of these Divides?or, God forbid, both?Wall Street doesn't want any part of your action. If you are on the right side of these Divides, Wall Street will overlook even the most egregious of sins. You don't even have to turn a profit. A plausible path to future profits will suffice.

There are many who say that what is really going on here is a bubble; a kind of technological tulip craze. The establishment business press says so. Established business leaders say so. Academics and economists churn out papers and monographs on the subject. Editorial writers fret about the consequences.

And there is no question that on one level, all these learned people are right. There is rampant speculation in Internet stock offerings. There are wild valuations of companies that amount to little more than glorified press releases. It is impossible to believe that America Online can continue to hold its market capitalization of roughly $160 billion. Any number of Internet companies will soon go belly-up.

But on another level, all of these experts are exactly wrong. It is not important that AOL may or may not be overvalued. The market will eventually correct that, if correction is needed. What is important is that the market is almost certainly right about companies that are on the wrong side of the Digital and Genomics Divides. Companies that think that they can continue to do business without taking Internet technologies and genomics discoveries into account really are companies that are doomed to fail.

Last week, I drove from New York to Boston, passing through Hartford along the way. Hartford is the insurance capital of the Eastern United States. The insurance business is being turned upside down by Internet technologies and genomics. Internet technologies are turning insurance products into commodities and completely changing their marketing and distribution. Genomics science will soon render the whole concept of actuarial tables moot. Companies like Aetna must now reinvent themselves to deal with these new realities. Failure to do so will leave them, and the city of Hartford, on the dead end of the new economy. It really is, as Ross Perot might say, that simple.

The mistake people make is thinking that Internet technologies and genomics are business categories, like financial services or automobiles. They're not categories, they're cross-cuts that change every business category in their path. Internet technologies completely change the dynamics of business information, interaction and distribution. Genomics alters the very processes of evolution. The combination of these two changes will, in due time, realign the global economy and its governance. In the near term, they are turning upside down the arithmetic of value.

Consider The New York Times. A recent survey conducted by The Columbia Journalism Review found that The New York Times was regarded as the best newspaper in the United States. It may well be the best newspaper in the United States, but it is no longer the best news source. The best news source in the country is Yahoo, in part because it draws on the resources of virtually every newspaper in the country (and around the world) as well as the leading wire services. For business news, Yahoo is so far superior to The New York Times it's not even close. For sports news, Yahoo's coverage is so much more comprehensive it's not even remotely close. And on and on it goes.

Next year, The New York Times will spin off its Internet operations into a separate, publicly traded corporation. The valuation of NewYorkTimes.com is expected to far exceed the market valuation of the parent company. When that happens, the most important people at the New York Times company will no longer be the editors, writers, columnists and executives at the paper. The most important people at the company will be the geeks who manage the Web properties. They'll be the new stewards of the brand. They'll dictate the future of the paper. And they'll find themselves three years behind the geeks who put out Yahoo's news package every day, 24 hours a day.

Consider Estee Lauder, the cosmetics company. The company currently sells hope in the form of blush-on and wrinkle cream. In the post-genomics world, Estee Lauder (or the genomics-based company that owns it) will sell skin cream that represses aging genes while it simultaneously delivers medicines into your bloodstream to lower your blood pressure or ease your arthritis. The value of Estee Lauder skin cream is not much. The value of Estee Lauder skin cream that delivers genomics-based medicines and therapeutics is astronomical. Which is why so many cosmetics companies are scrambling to catch up with genomics research. If they continue to just sell blush-on, they know their comparative advantage will be exactly nothing.

The good news for businesses is that the game is just beginning. There's still time to reinvent themselves for the new business age. And Wall Street is all ears. They're more than willing to upgrade any company that can present a convincing case for how it intends to get on the right side of the Divide. Indeed, they want to hear it, since the new economy constituencies reward companies that "get it" with their investment dollars.

The bad news, at least for old economy companies, is that the pace of change is accelerating. Last week, an international team of researchers achieved a significant scientific milestone by unraveling for the first time the genetic code of an entire human chromosome. Next year, it is expected that the entire human genome will be sequenced. Internet technologies are advancing with such extraordinary speed that it is almost impossible to keep up with the breakthroughs. And at some point, the Digital and Genomics Divides become Grand Canyons that old economy companies cannot cross.

Wall Street hates Disney but loves Pixar, which provided the computer animation that created Toy Story 2. Wall Street hates Revlon, the venerable cosmetics concern, but loves Celera Genomics, a genomics company that is seven months old. If you're investing money in the markets, make sure you know on which side of the Divide your investment sits.

jellis@nypress.net