It’s no secret from anyone at this point that VC investors over subscribed in internet infrastructure. This splurge was at least 5:1 up to maybe 9:1 too much equipment for the actual content business being transacted on the web. Too many marginal business models assembled absurdly inefficient hardware platforms came to life under VC capital that didn’t know or care about the underlying market demand for their products.

We are seeing these mistakes un-coil as the year progresses. The interesting thing is that the real business base on the internet has continued to grow. The mainstream adoption in the United States to use research content and a real shift of commerce to e-delivered venues moves along at a healthy clip. There’s lots of good business to be entered into on the internet.

The aggregate size of the revenue base is still not up to 9X of the 1999 baseline level. That’s the year when mania caused otherwise well learned and converative bankers to buy into market adoption curves that were so far off the long-run geometric rate of growth that one would normally have gotten a “See Me Now” mark in red ink from your professor in graduate school. Go figure.

The bottom line is that in relative terms a negative imbalance still exists between sustainable business to installed infrastructure. Makes it easy to see why equipment liquidation dot-com’s are pretty popular right now. They will remain so until the ratios come closer to equilibrium. Maybe another 1/2 year to a year depending on how quickly the dancing to cover up the boo-boos happens.

On that note, we are still seeing a lot of energy being expended by VC’s, banks, et al to hold off the inevitable recognitions of permanent impairment of their internet investments. By fourth quarter ‘01, expect to see FASB rules kick in forcing these losses to be recognized. Discontinued operations, no demonstrable path to recover the initial capital, and demonstrable proof that the target market has evolved elsewhere. My guess is that the invesment houses are digging deeper holes using their remaining cash to service the weighted average cost of capital (WACC) service payments on the bad money. The nightmare keeps the ulcers going until they either take the gut punch or run out of cash to paper over the problem. For many, they are hoping a buyer surfaces before it’s too late so they can hide the blunder behind a sale transaction.