Network Effects

It was during that same period that Reamer's thinking on the principles of Internet valuation began to evolve. He'd stumbled across the writings of Brian Arthur, the former Stanford University professor who popularized the field of increasing-returns economics. "I was a huge Microsoft bull," Reamer says. "Covering Microsoft gave me a natural curiosity about how to replicate Microsoft. What was the real driving force of the business? What was the underlying economic principle behind its incredible valuation? In my view, it turned out to be increasing returns. It just crystallized the reasons behind Microsoft's inexorable rise. It's not rocket science, but it does call for a change in thinking -- a certain leap of faith."

What helped Reamer make the leap was that he came to Arthur's ideas not with the know-it-all mind-set of an MBA, but with the open-minded perspective of an engineer. "Engineers are problem solvers," he explains. "They look at an outcome and say, 'How did that happen?' It's free association. You're not locked into any one rule. That's why I try to hire as many engineers as I can. I absolutely think the source of the success I've had in analyzing Internet companies comes from my engineering background."

From the perspective of creating shareholder value, a handful of companies -- Microsoft, AOL, Amazon.com, eBay, Yahoo! -- are clear-cut cases of increasing returns. "It's still too early to say whether this thesis is proven or not," says Reamer. "But that's the bet I'm making. These ideas inform my research -- the presence of increasing returns in these companies and their business models."

Last summer Kiggen left Cowen to join another Wall Street outfit. After years of second billing, Reamer became SG Cowen's star player in the Internet space. One of his first moves after settling in was to found "The Internet Capitalist," a biweekly roundup of analysis, research, and commentary. And, in the spirit of the new Internet economy, he decided to give it away free of charge. "I'm just trying to apply the same Internet principles to my own little franchise that the companies I follow use," he says with a grin.

Today, Reamer's readership is in the thousands. And in the stodgy world of Wall Street analysis, the "Capitalist" remains in a league of its own. The reason has less to do with its free online availability than with its iconoclastic style. In one of his first issues, Reamer included a section called "Froth Watch," the purpose of which is to highlight what he believes are excellent indicators of the indiscriminate nature of shareholder-value allocation the market has been practicing. "A bunch of Web companies, including Onsale, Cyberian Outpost, and Bluefly, ended up on the receiving end of Reamer's scorn. He even criticizes his own research. A piece back in March, entitled "Why We Were Wrong on Sterling Commerce Inc." (the one stock he tracks that has underperformed), began with a quote from Samuel Johnson: "Studious to please, yet not ashamed to fail."

It's not just Reamer's entertaining opinions (or his one-paragraph movie and book reviews) that keep readers coming back. In commentaries such as "Why Increasing Returns Matter to Valuations," "Disintermediation 201," and "The Art of (Broadband) War," he tackles big themes that underlie Internet investing. "You could never get away with publishing 'The Restaurant Capitalist' or 'The Oil-Field Capitalist,' " he quips. "Those are mature industries; people understand what drives them. But the Internet is a nascent phenomenon, 'The Internet Capitalist' can find a home in people's brains and on their desktops."

Back at the office, it's the end of the day. Reamer has a dinner meeting with a client from Singapore. Then he's taking his research team to see Austin Powers: The Spy Who Shagged Me. (They need a movie to review for the upcoming issue of "The Internet Capitalist.") When he returns to his apartment in the West Village around 11:30 pm, he may take his new racing bike for a spin through Central Park. "Even then," he says with a grim laugh, "I'll still be thinking about these companies." No kidding. On his whiteboard, there's a note reminding him to eat and exercise. "There's definitely a downside to being in the middle of this universe," he says, "and that's the time demands; they're unbelievable. Everything else in my life takes a second role."

The phone rings again, and Reamer is just about to answer it when another thought strikes him. "If I had to cover oil fields or some other mature industry, I'd probably quit and do something else with my life," he says. "But with the Internet, we're going to look back in 10 or 15 years and realize that in 1999, we were just at step one. We were in at the inception of something huge: Something that, in 5 or 10 or 15 years, may be 20% of the GDP. This is just such an enormous event in the economic, political, and social history of the United States and the world. It's just such an unbelievable time. I wouldn't want to do anything else."

He ponders that last statement for a moment and then takes the call. It's another client wanting to know his perspective on the value of a new Internet company.0D % Eric Ransdell (ransdell@well.com), a Fast Company contributing editor, is based in San Francisco. You can visit Draper Fisher Jurvetson on the Web (www.dfj.com) or contact Steve Jurvetson by email (mail@drapervc.com). You can visit SG Cowen on the Web (www.sgcowen.com) or contact Scott Reamer by email (reamers@sgcowen.com).