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Survival of the Fittest: Permian Partners Thinks Evolution, Not Revolution, to Measure Internet Success

Back in the early, primeval days of the Internet [circa 1998], when two thirds of the earth’s surface was covered by water, the other third seemed to be covered by speculators looking to make a fast buck. Then the meteor struck and the earth stood still. Today, we find ourselves in the modern equivalent of the Permian era, an age when only the fittest – not the biggest (market cap) or the coolest (street buzz) will survive. The ones who successfully “evolve” are the companies in which Peter Atkins and his new firm, aptly named Permian Partners, intend to invest a planned $100 million fund. The time to act is now, says Atkins, while current undervalued businesses can achieve real appreciation.

Atkins’ career has spanned key strategic planning roles ranging from TIME-Warner media assets like Fortune Magazine to Microsoft’s flagship Internet brands like Expedia, Carpoint and Sidewalk, and then as general manager for new E-business development at MSN. It’s precisely that experience that leads Atkins to believe investors must take an evolutionary approach to the Internet, not get caught up in the revolutionary hype of the moment.

What drives this 37-year-old New York native’s optimism for the Internet sector, particularly the advertising, subscription and business models? We talked with Peter about how he recognizes the most enduring – and most endangered – of the Internet species.

Seattle24x7: Peter, how would you explain your confidence in the Internet sector at this pivotal time?
Atkins: If you ask people today to raise their hands and answer the question, ‘How many of us think that the Internet services we have are as good as they could possibly could be?’ no hands would go up. Every consumer out there can see how the various services they use, be they MSN Hotmail for E-mail, or Expedia for buying an airline ticket, or Amazon for making a purchase, or a variety of other services, could be better. They will get significantly better. As that happens, more and more consumers are going to spend more and more time interacting with the Internet and that’s a great opportunity for businesses. Over the long term, if you really understand what you’re doing, there’s a great opportunity to partner with some great companies who will grow and prosper.

Seattle24x7: Sounds like a realistic position.
Atkins: Two years ago the market was wildly optimistic. I, too, was selling or shorting the stocks of a lot of these Internet companies. Today, the market has become way too pessimistic and I think they’re throwing the baby out with the bath water.

Seattle24x7: What are going to be the criteria in your investment strategy?
Atkins: There are three key guildelines for companies that we’ll invest in. First, we’re only going to look for businesses that we understand well and that we like – specifically in the online advertising, online subscription, and online e-commerce space. Secondly, these companies are going to be run by first rate management teams that we think are both honest and competent. And thirdly, they will be available at valuations that are reasonable. In other words, even if you have a great company run by smart people, if you buy in at a price that’s too high, that doesn’t make sense. That, quite frankly was what wasn’t available a couple of years ago, and now IS available.

Seattle24x7: Why do you think now is the right time?
Atkins: The underlying statistics. There are more people using the Internet today than two or three years ago, and by dramatic numbers. If there was a good business opportunity then, there’s a great business opportunity today. At this point, it’s also easier to separate out who going to win and who’s not. Both because management teams have had time to prove themselves, and businesses have had time to develop.

Seattle24x7: Can you give us an example?
Atkins: Expedia is a good example. Seven or eight months ago, Expedia was trading at a fraction of its current market capitalization. It’s gone up by something like a factor of four. Well the business didn’t all of a sudden become a great business. It was a great business 6-9 months ago. People didn’t see that value at the time.

Seattle24x7: You mention advertising and subscription modelled companies as ripe for investment?
Atkins: I think advertising and subscription are viable and in fact, very strong business models. Take TIME Inc., which is the largest magazine publisher in the country. Many of the properties they’ve started that are very successful today took literally ten, twelve or more years to become profitable. Sports Illustrated, for example – it took fourteen years for that business to become profitable. Today, it’ s an incredibly profitable franchise that generates tremendous revenue from advertising and from subscriptions.

Seattle24x7: Patience is a virtue.
Atkins: These things don’t happen overnight. So we’re not investing in a short term time horizon. We want to invest in businesses and management teams that can succeed over the next five or ten years and become great businesses.

Warren Buffet, who I think is probably the greatest investor, ever, owns some shares in the Washington Post, he owns the Buffalo News outright .There’s nothing wrong with that model. In the online world, is it going to take a few more years for some of these properties to mature? Definitely. Are there things about the model that needs to be tweaked? Yes. But it’s more of an evolution in the model, not a revolution.

Seattle24x7: Speaking of survival of the fittest, MSN has grown tremendously, in part with technology from Sidewalk.
Atkins: When I went to work on Sidewalk, I think I was employee 16. by the time I left we had 1000 people on Sidewalk. In 1999, we had a 10 share on Media Metrix which was something like double our nearest competitor, beating AOL Digital Cities and CitySearch on the consumer side, as well as the ad revenue side. Expedia and CarPoint were also on track to be number one in their individual segments.

The challenge for Microsoft was the portal effort as a whole. The focus became one of improving the overall effectiveness. What they did was took a lot of the best people and a lot of the technology that was being used on Sidewalk and sort of ported it over and rebranded it MSN. So all of the MSN E-Shop, Yellow Pages, the core technology platform, came from the Sidewalk effort.

Seattle24x7: Adaptation of the species?
Atkins: It was the company getting smart and pulling together a lot of the assets it had and going forward with an overall effort. If you go back three years ago, MSN was an also-ran. There was Lycos and there was Go and there was Excite. Today it’s AOL, MSN and then probably Yahoo! So MSN has become one of the top two or arguably top three portals in the world.

Seattle24x7: Thanks for the geology lesson.

Larry Sivitz is the Managing Editor of Seattle24x7.