Fast and Easy Times Over for Internet Firms
It’s the end of the beginning, the end of the very hyped, very heady first wave of the commercial Internet revolution.
Gone are the days when a good idea, slick business plan and a couple bright grad-student programmers were all it took to catch the eye--and pocketbook--of some Silicon Valley financier willing to gamble on an unknown for the chance to make a fortune.
Next year, reality bites the Internet business--and bites hard.
It doesn’t matter who you talk to--stock watchers, entrepreneurs, editors or presidents of multimillion-dollar enterprises. They all say the same thing: In 1997, there will be a reckoning, and Internet companies that haven’t nailed down brand, market share, customer service, revenue or profits will be judged, found wanting and vanish or be swallowed by the more successful.
“Companies are going to go out of business left and right, and the avalanche of businesses going under will chill the industry,” said Charles Ardai, president of Juno Online Services, which offers free, advertising-supported e-mail.
Most vulnerable are the many firms building businesses around online advertising, which is growing but is not yet nearly large enough to sustain all the ventures hoping to sell ad banners on their World Wide Web pages. Newspapers, magazine publishers and other content Web sites could be the hardest hit, analysts and other Internet watchers said.
Other likely casualties are local Internet service providers, which must fight off the big telephone and cable companies racing to offer cheaper, more ubiquitous Internet access. Companies trying to compete in overcrowded niches, such as Web directories, could find themselves in trouble as well.
Many of the firms that went public during the go-go Internet IPO market of 1995 and early 1996 are vulnerable now that prices for online issues have fallen back to Earth.
“There are a lot of companies that did IPOs that have been burning through their capital at a prodigious rate,” said David Simons, managing director of Digital Video Investment, a New York institutional researcher. “Netcom has been burning through it at 10% a month, which is why their stock is trading at half of its cash plus book value. There’s a definite possibility there’ll be some rather spectacular flameouts.”
Prognosticators also predict:
* The number of Americans logging onto the Internet will continue to grow, but at a diminished pace, the result of a slowdown in home PC sales. “The Internet phenomenon grew up on the back of 30% growth rates in home PC sales,” Simons said. “The slowing of that growth rate for even a year can send many Internet companies sailing toward a fall.”
* Consumers will give a big thumbs down to WebTV and other low-priced TV-based Internet appliances, but corporations will slowly adopt network computers, or NCs, the much-vaunted diskless workstations that connect to the Internet and eventually could pull up software on an as-needed basis.
* Periodic outages like the ones that zapped America Online, AT&T; and BBN Planet earlier this year will continue, even as hardware makers prepare to introduce faster access in the form of 56.6-kbps modems, cable modems and digital subscriber line, or DSL, technology.
* Interminable trials of secure credit-card transaction protocols and lingering concerns over the safety of shopping online will delay widespread consumer acceptance of electronic commerce and online banking, while companies selling Web commerce software and hosting services to retailers and direct marketers will scramble for market share. E-commerce will fare better in business-to-business situations.
* The Microsoft-Netscape jihad over Internet software will escalate. What started out as a battle of the browsers--Netscape won that round--has intensified into a fight for control over how people use their computers. Both Microsoft and Netscape are developing software that would meld an improved browser into a PC operating system. Microsoft calls its version Active Desktop, while Netscape’s is Constellation. The companies are duking it out in other areas as well, including the Web server business.
Despite the many difficulties Web businesses face, companies that figure out how to make the Internet useful--and not just fun to play with--clearly have an enviable future.
“People think of the Web as content and equate it simply with stuff to read or view,” said Tim O’Reilly, president of O’Reilly & Associates, the Sebastopol, Calif., publisher and software developer. “But at the end of the day, it’s the Web’s power to create infoware--to handle a different class of problem using a computer--that will emerge as a really significant new industry.”
Already, though, Internet has-beens are stacking up. At least a dozen projects or companies that started 1996 full of promise didn’t see December. Another significant casualty: Online services’ old business model of charging by the hour for access to proprietary networks and content. By the end of the year, all of the major online services had redesigned their services to live on the Web or cut prices to a $19.95 monthly flat fee, or both. America Online was the last to switch, starting $19.95-a-month pricing on Dec. 1.
Even as online services embrace flat-fee pricing, though, others are beginning to abandon it. Many independent Internet service providers say it’s impossible to make money on such low flat-fee prices, and they’re getting out of a home Internet access market that analysts say will increasingly be dominated by big telephone companies. Netcom is the most recent refugee, announcing in late December that it was dumping $19.95-a-month pricing and moving to higher rates as part of a strategy to cater to small and medium-sized businesses.
“Netcom is dead, as are all the other consumer-oriented ISPs,” said Mike Rothman, a vice president with META Group Inc., a Reston, Va., Internet researcher. “All they have is a non-loyal consumer base. Most have tried, unsuccessfully, to penetrate the corporate market, but will have no luck. The only thing saving Uunet and BBN is the fact that they have predominately dedicated connections to business users, where the churn is significantly lower.”
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Other companies are taking a different tack, providing Internet access at little or no cost as incentive for subscribers to read ads or buy sponsors’ products. One such company, FreeRide Media in New York City, lets people amass points toward free monthly access by visiting advertisers’ Web sites or buying products and then mailing in proof-of-purchase coupons for credit.
Internet access companies’ overseas prospects look brighter. Major ISPs that already operate internationally will increase their coverage and others will plunge into foreign markets where growth potential is higher, experts and company officials said.
“Prodigy will surprise people as we begin to make good, strong deals with foreign partners, which will be profitable in very short order,” said Marc Jacobson, a company vice president and general counsel.
One of the most widely anticipated Internet events of 1997 is the spread of cheap, TV-based appliances that proponents believe will finally bring the Internet to the two-thirds of U.S. households that don’t yet have PCS.
Sony, Philips and WebTV Networks were the first out of the chute, with $300 Internet terminals and a companion online network that went on sale in early November, backed by a major national advertising campaign (WebTV counts Times Mirror Co., publisher of The Times, among its investors).
Competitors preparing their own Internet TV devices include Sega, Bandai, Sanyo Electric, Samsung Electronics, Hitachi, Mitsubishi, and Zenith.
In the weeks before Christmas, executives at Sony, Philips and WebTV professed to be pleased with consumer interest, though they wouldn’t disclose sales figures.
“It’s living up to its billing as a ‘wow’ product,” said Ed Volkwein, a senior vice president with Philips Consumer Electronics Co. in Knoxville, Tenn. “Everyone who’s seen it thinks it’ll be an instant success.”
But skeptics say any public love affair with Internet TV will be brief. Internet appliances’ shortcomings are many, including the inferior quality of Web pages viewed on a TV set. What’s more, Net surfing is mainly a solitary pursuit, not something you want to do sitting on the couch with the family gathered round, they maintain. And there isn’t really all that much on the Web that’s ready to compete with television in the family entertainment arena.
“My guess is [companies] will sell a bunch for Christmas and by the time Mr. Clinton is sworn in for a second term, they’ll be in a closet somewhere,” said Harry Fenik, vice president with Zona Research, a Redwood City, Calif., Internet researcher.
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Even if the first round of Internet appliances don’t fly, look for consumer electronics companies to keep trying.
“The consumer electronics crowd are trying desperately to move into the PC space, which will produce some really weird hybrids,” said Kate Delhagen, an analyst with Forrester Research in Cambridge, Mass. “The first products, like WebTV, Internet phones and palmtops, are not very good overall, but each has at least one redeeming quality that, if nurtured, could trigger the next thing.”
Among the hundreds of companies hoping to make a living supplying Web “content,” those that aim to support themselves with advertising face the biggest challenge. Ad dollars are still only trickling in, with Web page ad spending totaling $34 million to $66 million in the third quarter, depending on which audit firm is doing the counting.
Ad agencies and their clients are still trying to agree on basics, such as standard sizes for banner ads, and what products sell the best.
The Internet business model of the moment is “push,” software or other technology that brings information to a person’s computer desktop rather than making them seek it out on the Web. PointCast helped pioneer the concept with the February 1996 debut of a free service that brings “channels” of headline news and advertising to an idle computer screen.
PointCast’s success--the private Cupertino, Calif., company has 1.7 million active viewers, 140 advertisers and has raised $48 million in venture funds--has spawned a raft of “push” players, including Marimba, BackWeb and Lanacom.
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Speaking of crowded fields, one of the most overpopulated corners of the industry is the Web directory market. In 1996, four search companies went public--Yahoo, Excite, InfoSeek and Lycos--and Excite acquired two others, McKinley Group and WebCrawler.
Analysts don’t expect all four to make it through 1997, given most of the companies’ low market valuation, and the resources and manpower individual companies are lavishing on added features without a commensurate increase in ad revenue.
“Someone has to say, ‘Where’s the money?,’ ” said Simons, with Digital Video Investments. “It’s clear now that a lot of these companies that depend on the public markets for funding can’t go back to the public market, even with the market within 2% of its all-time high. Unless there’s a miracle, it’s going to be more difficult next year.”
On the electronic-commerce front, despite success stories such as Cyberian Outpost, CDNow and Amazon.com, Internet shopping won’t attract mainstream consumers until at least late 1997 or 1998 at the earliest.
That’s when banks and credit-card companies expect to have the infrastructure in place to offer secured credit-card transactions.
But even when retailers, banks and creditors are ready, consumers might not be, said Bob Denny, author, programmer and developer of O’Reilly & Associates’ WebSite server software.
“There have to be enough people with consumers who want to buy over the Internet, and right now [the Net] is competing with catalogs” and other sales channels, Denny said.
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Michelle V. Rafter is a frequent contributor, and writes about the Internet for Reuters and the Chicago Tribune. She can be reached at mvrafter@deltanet.com
