When Merrill Lynch Internet expert Henry Blodget talks, markets move. And, as a result of some of his freewheeling predictions during his Thursday morning keynote address at the Silicon Alley 2000 conference, some stocks could start swaying. Blodget, head of Merrill Lynch's Internet research, didn't hold back on his opinions -- from the impact on stockholders resulting from a potential court ordered break-up of Microsoft to why he remains bullish on the America Online (AOL)/Time Warner merger -- in spite of possible management defections.
Blodget's analysis of Microsoft's future challenges was especially far-reaching. He told the audience that Microsoft is currently fighting a two-front war, but that it's only likely to win in one arena. On the office/operating system front, Microsoft is battling Sun Microsystems and Oracle, while on the consumer front, it's facing off against AOL.
"They won't win both sides," Blodget claimed. "Their content and commerce properties are strong, but they missed out on launching an overall portal, like Yahoo!. I wouldn't be surprised to see Microsoft buy Yahoo! -- if they were allowed to -- to compete with AOL."
Whether Microsoft would be allowed to make such an acquisition, given the current federal anti-trust suit in which the company is embroiled in, is a big if. But Blodget noted that if the government was to "chop up" Microsoft, such a move would result in higher shareholder value.
Microsoft wasn't Blodget's only target during his talk on "The 'Net Stock' Phenomenon". The senior analyst had plenty to say about AOL Time Warner, too.
"AOL Time Warner is very well-positioned to benefit from the Internet's impact over the next 10 years," he told conference attendees.
He cautioned the audience not to lose sight of the forest through the trees, by dwelling excessively on whether AOL or Time Warner benefited more from the merger. He also said that even if as many as 20 percent of Time Warner managers, whose options have vested as a result of the merger, decide to fly the coop, the combined company is still going to be a powerhouse.
"If any merger of this size can work, this one can. They [AOL Time Warner] own both sides of the equation," Blodget said. "They own the cable and the Internet service. They own the music and the Internet platform for distributing it. They own TV and the online service for interactive TV.
"They own both the content and the distribution at this point in time," Blodget continued. He added that in the long term, he expects to see the merged company divest itself of a lot of "capital-intensive, slow-growing, low cashflow assets", which could include cable and/or its music business.
"If AOL can go up 600 percent per year, does it matter that it's overvalued?" Blodget asked the audience. "Investors can't afford not to be involved."
When asked about his take on the prospects for the new generation of professional services firms -- the Scients, Viants and Razorfishes of the world -- Blodget was equally upbeat. "These companies are taking a lot of value away from traditional consulting companies. They're not driven by equity compensation."
In the long term, services won't be as "scalable" as a Yahoo! or as margin rich as a Microsoft, he noted. In fact, of the 300 or so "pure-play" Internet companies that have gone public, Merrill Lynch predicts 75 percent of them will never make money and won't exist in five years time.
But with the Internet sector destined to create $2 to $3 trillion worth of market value in the next few years, there's still lots of room for hot start-ups and other new opportunities, Blodget added.
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