The dot-com crash doesn't mean the Internet is going away. But I think some individual companies deserve to die. Many "Internet companies" simply don't understand the Internet.

I live literally down the street from a company whose business plan centers around the celebrity appeal of ex-Surgeon General C. Everett Koop: (Nasdaq: KOOP). It's never been close to profitable, although its stock has been publicly traded for a year and a half now. is, in my opinion, an example of a company that missed the point of the Internet.

The Internet allows even young children to put up websites, which can then be viewed around the world. For a couple hundred dollars a year you can have your own domain name and server space to put up anything you want. You can pay for it with a paper route, let alone a full-time job. Using the Internet is REALLY, REALLY CHEAP.

Anybody remember how Yahoo! (Nasdaq: YHOO) started? Two college students put up their personal "bookmarks" list on their Web page, years ago when the Web was new. Back before they got venture capital, they didn't need money to keep Yahoo! going because they weren't spending any. Jerry Yang and David Filo donated their time to it as a hobby, and people who used their list sent them more links to add to it. The computers and bandwidth would have added some expense if they hadn't been provided by Stanford University, but still less than a single full-time employee's salary. Until Yang and Filo decided to make a living out of their hobby, there was no pressure on Yahoo! to be profitable. No debt, no expenses, no problem.

Nowadays, Yahoo! has advertising, auctions, cross-licensing agreements, and several other sources of revenue bringing in hundreds of millions of dollars each year. This pays the salaries of the hundreds of people on staff that collect and organize new content for the site, and for the buildings and equipment the much larger site now requires, but Yahoo! only chose to take on those expenses because it believed revenues would grow even faster. And it was right: Yahoo! is profitable today. It knows what its expenses are and what it gets in return for those expenses.

The Google search engine is another great example, a company that has decided to focus on the niche Yahoo! has long since diversified away from: being a search engine. How does Google make money? Among other things, corporations pay it to index their websites for them, effectively outsourcing their "search this site" functionality. Google is good enough at what it does that people are willing to pay for its services.

Google uses enormous clusters of standard commodity PCs, which are cheap, running the Linux operating system, which is free. Its expenses are the salaries of employees to make the system work (some to customize and optimize Linux to do what they want it to, some to assemble and configure the racks of computers and networking equipment, and of course some marketing and administrative people). Google rents space from other people's data centers because it's cheaper than building its own. Google understands perfectly that the secret to being profitable is squeezing every drop of value you get out of every dime you spend, NOT having buckets of revenue and watching it drain out faster than it comes in.

A real Internet company is lean and mean, not extravagant. The Internet isn't inherently a source of revenue, it's a marvelous way to reduce costs for those who already have some other source of revenue. The publishing industry translates naturally to the Internet, where one writer can easily find many readers, multiplying the value of that writing. Glossy color print magazines can easily cost 50 cents per page, and would easily cost $20 a copy if they didn't make the bulk of their profit from advertising.

The Internet allows a print publication (like Tom and David Gardner's little investing newsletter) to find a much wider audience while eliminating the main cost center: printing. Trading away the revenue from the cover price in exchange for ditching the printing costs is actually quite a bargain; the magazine's publisher comes out ahead, and can then scale to higher volumes with less investment (assuming the online magazine is successful in attracting a readership). They still need staff to provide content, and shipping costs are replaced by bills for bandwidth and servers, and there's always the need to budget for marketing. But on the whole, it's a great deal.

The Web is inherently a publishing industry. Most successful online businesses have actually been some variant of a magazine all along. Yahoo! started as the phone book of the Internet, the business-to-business websites are mostly automating paperwork, and e-tailers are really in the mail order business. Web pages have many advantages over print catalogs other than just cost, as can be seen by comparing (Nasdaq: AMZN) with the book-of-the-month club. But the idea of ordering goods and services from the privacy of your own home is as old as the Sears (NYSE: S) catalog.

Hence we return to Let's assume that if it were wildly successful, it could become as popular as a national magazine like Time Warner's (NYSE: TWX) Time or People, or Gannett's (NYSE: GCI) national newspaper USA Today. Would that justify its spending levels, burning through tens of millions of dollars of venture capital each year? Would it be profitable afterward? What's a realistically achievable goal, how does the company get there, and what level of spending would achieving that goal justify?

The dot-com crash is just the market's invisible hand cleaning house. The Internet is a wonderful thing, and it's changing the entire economy the way the printing press did centuries ago, but it's no substitute for a business plan. Some companies are dying because they're spending a lot more money than they're taking in, and hoping this won't eventually cause a problem. Others have been dragged down in the general panic and become bargains. Telling the trash from the bargains involves determining which companies have a profitable future.

Investing in brand name and customer relationships is one thing, but having an actual achievable target to work for is very important. In the end, profitability is simply about making more money than you spend. In their frantic quest for rapid growth, too many companies focus on the "more money" part and forget the last three words of that sentence.

- Oak