Most everyone has written off the dotcoms. Smart investors are finding the real value.

Every nine months McKinsey and Co., the world's premier management consultancy, publishes an "e-performance" survey of more than 200 Internet businesses around the world. These dotcom companies have combined revenues of roughly $2 billion. The most recent survey, published in May 2001, found that 20% of the companies covered were profitable and that a significant number of the others were heading in that direction.

Dotcoms that were making money were "e-tailers," with clothing e-tailers doing particularly well. Companies that were losing money were content sites; news and sports sites were struggling the most. Monika Kubicová, one of four McKinsey consultants who oversee the survey, told the Financial Times, "For e-tailers there is quite good reason for optimism, with a reasonable number starting to show profitability. Content businesses, however, are still playing with their business models and are in the red."

The McKinsey survey received virtually no press coverage, because it did not fit the major media's prevailing conventional wisdom, which is that the Internet sector in general -- and the dotcom sector in particular -- is as dead as smelts. But as the survey makes clear, for something so dead, these sectors are showing all kinds of life. This past July, a streamlined announced that it had turned a second-quarter profit. Google, the search-engine site that is now run by former Novell wizard Eric Schmidt, recently announced that it was solidly profitable. EBay,, and a host of other companies also reported strong second-quarter earnings. All of these solid performances occurred in the teeth of a global economic slowdown.

Indeed, the big, largely unreported summer story of 2001 was the renewal of financial interest in all things related to the Internet. Goldman Sachs and other major investment houses swarmed across Europe, bottom-fishing among distressed telecom and wireless properties. Deal flow in Internet-infrastructure companies quickened in the United States as price points became much more "realistic." Even seemingly doomed content companies such as attracted funding.

A couple of years from now, people will look back on the summer of 2001 as the time when the music started up again. Dan Burstein, a managing partner of Millennium Technology Ventures LP (MTVLP), is one among many smart investors who see the wind shifting. For almost 15 months, Burstein says, MTVLP didn't see a deal that was worth the price of admission. In fall 2000, MTVLP knew of one that was priced at $1 billion. By spring 2001, that exact same deal was valued at below $100 million. At $1 billion, the deal was an almost perfect metaphor for Internet insanity. At below $100 million, it was a good investment. MTVLP bought a stake. Burstein sees the current situation as analogous to the savings-and-loan crisis and the great real-estate collapse of the late 1980s to early 1990s. The S&L meltdown led to write-offs of more than $500 billion and caused a meltdown in the real-estate sector. At the time, there was much talk about "overcapacity" and "glut" in the real-estate markets. Today, the telecom industry may have to write off anywhere from $300 billion to $1 trillion in bad debt. And that has caused severe distress in the Internet-infrastructure world.

Having worked at the Blackstone Group LP prior to setting up MTVLP, Burstein has good institutional memory of what a big opportunity looks like. Under the direction of former commerce secretary Pete Peterson, Blackstone surveyed the wreckage of the S&L/real-estate crisis and decided to establish a separate entity to get in on the action -- even though Blackstone had no prior experience in real-estate investing. The company ended up buying packets of properties, and when the market revived in the latter half of the 1990s, Blackstone sold them off at a staggering profit. Burstein thinks that the telecom and Internet shakeout of the past two years is an investing opportunity of similar size and scope.

Consider the prevailing wisdom that there is a bandwidth glut. You can read a thousand research reports on the Internet, and invariably you will find someone whining about this glut. It is certainly true that the information superhighways running down the fiber-optic lines between major metropolitan areas are, for the moment, underutilized. But does that mean that they will be underutilized in five or seven years?

The likely answer to that question: Of course not. Pervasive computing means that new appliances, new security systems, new HVAC installations in buildings, whether commercial or residential, will communicate with server farms to exchange information constantly. Peer-to-peer technology will have computers talking back and forth to one another, constantly updating information for millions of end users. Gaming will continue to grow and become for the echo-boom generation what television was for the baby boomers.

All of these technologies will be added to an ever-growing traffic flow of email, messaging, searches, and business communications. Enabling all of this technology will require enormous amounts of bandwidth and gargantuan amounts of what George Gilder calls "storewidth": the response time between entering a request on the Web and getting back the first page. Bandwidth and storewidth companies have been hammered over the course of the past 18 months, to the point where they are now selling at relatively reasonable prices. Like the real-estate glut of the late 1980s, the bandwidth glut of the early 2000s is almost certainly a temporary phenomenon. So it's not surprising that major investment houses are scouring the countryside, looking at Internet-infrastructure companies that will enable the coming of all of these new technologies.

It will take a number of years before we know which investors made the right bets. The secret of business success is that much of it derives from luck and timing. But after 18 months of virtually no activity, with huge pools of investment money sitting on the sidelines in cash accounts, the great game has quietly restarted. Investment companies are back at the table placing their bets. And the biggest bets are being wagered in the beleaguered telecom sector, which makes sense. European telecoms in particular overpaid for spectrum licenses and, in doing so, jeopardized their franchises. Now they must sell off key assets to stay afloat. Those assets are selling at a significant discount. Situations like that attract big money very fast.

The next wave will occur in the Internet-infrastructure sector as companies with strong market positions but weak cash flow hit the wall and grow desperate. The last wave will be in a whole range of dotcom companies -- especially shopping bots. As peer-to-peer computing advances, shopping bots will not only be able to find you the best price on any given item, but they will also give you the ability to auction out your business. Kids need back-to-school clothes? Bid your business out on the Internet, and the Gap will have to offer you $1,000 worth of merchandise for $850. If it doesn't, Target will.

Ever since April 14, 2000, the question has been, When is this thing (the Internet business, for lack of a better phrase) going to turn around? The answer is in that McKinsey survey and in the behavior of some of the world's leading investors: It's turning around now. If the S&L/real-estate crisis is a suitable analogy, it'll take about five years to get from here to there. Along the way, there's lots of money to be made.

John Ellis ( is a writer and consultant based in New York.

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