« S&P's confused initiation of ASKJ | Main | Briefs updates on search, with implications »

Thursday, December 30, 2004

Five Internet danger signs to watch for in 2005

The next few weeks will likely see a flurry of predictions for 2005, to the point where you'll be sick of reading them. So instead, I'm providing something which I hope will be more useful for investors in Internet stocks and managers of Internet companies: a checklist of danger signals for Internet investors to look out for next year. For each danger signal, I've specified which stocks will subsequently be at risk:

Danger Sign 1: Microsoft announces an early release date for the next version of Internet Explorer.

Microsoft's track-record of delaying the release of Longhorn, the next version of Windows, has lulled Internet investors into a false sense of security. They expect that the only change they'll see in the browser market is that Firefox will continue to gain market share.

But this is a mistake, because it ignores the relationship between the browser market and the search business. Most people's choice of search engine will be determined by the browser they use, so Microsoft is strongly incented to release an improved version of Internet Explorer. That release will provide much of the functionality that currently induces people to switch to Firefox. Like Firefox (and Safari), it will have search conveniently embedded in the browser, so you can search without having to go to a search engine's home page. But unlike Firefox, which defaults to Google, the next release of IE will default to Microsoft search. Once that happens, Microsoft will rapidly gain share in the search market.

Stocks at risk: Ask Jeeves, Google and Yahoo!.

Danger Sign 2: Microsoft announces a firm release date for Longhorn, including integrated desktop and Internet search.

What client will most people use to access the Internet? Maybe the browser, maybe a combined tool that searches locally stored files and remote data. Danger Sign 1 covered the former; this covers the latter. Local file search will be integrated into the operating system, if Microsoft's past behavior is any guide to the future. If Microsoft combines local file search with search of remote data (Web pages and publicly accessible databases), then it has a strong probability of winning the search market and the pay-per-click ad business that goes with it.

Stocks at risk: Ask Jeeves, Google and Yahoo!.

Danger Sign 3: Category-killer Web sites get organized.

Investors tend to ignore trends until they affect the financial results of public companies. As a result, they've missed 4 critical changes that are transforming the Internet: (i) Web sites have become easy and cheap to create and maintain. (ii) Automated advertising technology enables advertising supported Web content businesses without requiring the hiring of advertising sales teams. (iii) Search engines favor frequently updated, category-killing Web sites. (iv) RSS makes it feasible for Web users to keep track of and view content from multiple small Web sites on a regular basis.

Put these trends together, and this is what you get: the creation of niche, category-killing, advertising-supported Web sites that get high placement in algorithmic search engine results and, once discovered, attract repeat-readers.

We've seen the first stage of this in the stunning proliferation of blogs. (Investors are generally unaware of this, because no blogging companies are public and Google doesn't talk much about Blogger.) The next stage will occur when Jason Calacanis' Weblogs Inc. and Nick Denton's Gawker Media successfully complete IPOs, and other bloggers start to organize themselves into sites with critical mass (multiple authors) and networks.

Once that happens, category-killer Web sites will take serious eyeball-share. If you want to read about cell phones, you'll go to Phone Scoop, Mobile Tracker or MobileBurn, instead of CNet. If you want to track Internet stocks, you'll come to The Internet Stock Blog because all it does is provide news and analysis of Internet stocks, and as a result it does that better than Yahoo!, CBS MarketWatch, TheStreet.com, and MSN Money.

Some readers will still want their information broad and shallow, but many others will want it narrow and deep.

(For greater depth on this issue see Four emerging Internet trends for investors and Internet investing: A new world of fragmentation and transparency.)

Stocks at risk: CNET, Yahoo!, TheStreet.com, CBS MarketWatch/Dow Jones.

Danger Sign 4: Offline retailers become more effective online retailers.

We've always known that multi-channel (offline and online) retailers have certain advantages over purely online retailers. They have established brands, they can spread their marketing costs over their store-based and online businesses, and they can advertise their online businesses in their physical stores. But until now they haven't worried investors who own the stocks of the pure-play online retailers.

That may change in 2005, as more offline companies improve their online operations. That could have two effects. They could simply take market share. But even if they don't gain significant market share, they'll drive up the price of online advertising.

You would have expected the leading Internet retailers to have sufficient brand recognition by now that they wouldn't be dependent on recurring advertising for customer retention. But that doesn't seem to be the case. Perhaps people who shop online pay less attention to the store they buy from and thus have less brand loyalty. Perhaps the Internet makes it easier to compare prices, and that weakens loyalty. Whichever it is, increased competition and rising advertising costs will hit the online retailers' bottom lines.

Stocks at risk: Amazon, Blue Nile, BlueFly, eBay, eCost, Netflix, Overstock.

Danger Sign 5: Category-specific search starts to become truly effective.

When most Internet investors think of search, they think Google, Yahoo! and maybe Ask Jeeves. They don't think Amazon, eBay and Expedia. But they should. EBay brings together buyers and sellers by providing (i) a platform for sellers, (ii) search capabilities that allow buyers to find what they want, and (iii) a mechanism for reputation evaluation. In addition to selling its own inventory, Amazon provides (i) a storefront and transactional platform for third party retailers and (ii) search and personalisation tools to help buyers find what they want. Expedia, Travelocity and Orbitz can be viewed as search engines optimized for travel.

Which begs the question: what happens if search engines become much better at category specific search? This could happen in two ways: the development of category specific search engines, or the inclusion of category-specific search in general search engines.

We're already seeing specialized search engines. Comparison shopping engines are really shopping specific search engines, Kayak is a travel-specific search engine, and eGuide is an event listings search engine. We're also seeing the inclusion of more effective category specific search in general search engines: MSN Search, for example, offers filtered search for movies, stock quotes and shopping.

At some point the search engines will recognize queries as category specific requests. Type in "JFK to LAX 1/21/05 return 1/31/05", for example, and it's not unthinkable that Google will produce a list of flights. Type in "10 year fixed rate mortgage LA" and you won't need BankRate. Type in "Ford Taurus used $3000-4000" and it's not unthinkable that... well, you get the idea.

Achieving that quality of search result will be easier where the underlying markets are more concentrated, harder where they're more fragmented. Web services, for example, should allow the airlines and large hotel chains to provide structured data feeds optimized for their category to the search engines. Individual sellers of collectibles might be less accessible.

Stocks at risk: Amazon, IACI/Expedia, Sabre/Travelocity, Cendent/Orbitz, Priceline, Travelzoo, CTrip, BankRate.com and maybe eBay.

That's it. Your comments  are welcome. Meanwhile, I wish all the readers of Seeking Alpha, The Internet Stock Blog and Sound Money Tips a happy and healthy 2005.

Full disclosure: At the time of writing, I'm short CNET and TSCM, long HOLL and SHOP. As always this is not a recommendation to buy or sell stocks.

Posted by David Jackson on December 30, 2004 at 11:03 PM in Sector Themes/Outlook, Sub-sector: Content, Sub-sector: E-finance, Sub-sector: E-tailing, Sub-sector: Search, Sub-sector: Travel, ticker: AMZN, ticker: ASKJ, ticker: BFLY, ticker: CNET, ticker: CTRP, ticker: EBAY, ticker: GOOG, ticker: HOLL, ticker: IACI, ticker: MSFT, ticker: NFLX, ticker: NILE, ticker: OSTK, ticker: PCLN, ticker: RATE, ticker: SHOP, ticker: TSCM, ticker: TZOO, ticker: YHOO | Permalink


TrackBack URL for this entry:

Listed below are links to weblogs that reference Five Internet danger signs to watch for in 2005:

» Web 2.0 Weekly Wrap-up, 9-15 January 2005 from Read/Write Web

Time for a look back at the week that was in Web 2.0...

[Read More]

Tracked on January 16, 2005 05:16 AM

» Web 2.0 Weekly Wrap-up, 9-15 January 2005 from Read/Write Web

Time for a look back at the week that was in Web 2.0...

[Read More]

Tracked on January 16, 2005 05:22 AM

» Web 2.0 Weekly Wrap-Up from The Mediaburn Radio Weblog
Web 2.0 Weekly Wrap-up, 9-15 January 2005 . [Read More]

Tracked on January 16, 2005 10:07 AM

» Web 2.0 Weekly Wrap-up, 9-15 January 2005 from Read/Write Web

Time for a look back at the week that was in Web 2.0...

[Read More]

Tracked on January 16, 2005 02:32 PM


I agree with everything you say. The only problem is that most of it has been predicted for the last few years. Why hasn't it happened already? And if it hasn't happened already, what's the reason? One reason is that most users hate putting there credit card info twice. I'll pay more at Amazon just to avoid the checkout process somewhere else. As for Mozilla and search, I never use Mozilla for search. I didn't even know it had a search function. If you mean typing in drudge in the address line and going to the drudge report, then maybe that's what you mean.

Posted by: bjr@yahoo.com | December 30, 2004 09:22 AM

Besides RSS there is "bloglines." One thing I find fascinating is that one can make certain directories public. Combine this with an adequete search engine (existing) and it becomes possible to search a selected set of blogs and other sites for various topics. Thus once the set of pages is made one can search several hundred sites for "investing China" comments in the last month. This reduces clutter.

And the impression that bloglines is giving is that they welcome suggestions, the technology can be shaped.

Posted by: David Bennett | December 30, 2004 02:44 PM


Are you sure it's not happening. I suspect if you measure growth of many new functions then it is more rapid than the net market in general. These things do grow expotentially and it's slow at first. And growth isn't smooth, there are jumps and rapid transformations.

As for your argument for Amazon, the company also works well because of competitive pricing, extensive selection and a sophisticated interface that taps into resources such as buyers opinions. Convenience alone doesn't do it.

And to the extent your concern about retyping information is common, then this does create an opportunity for a company to standardize an order form, provide a link with password protection to vendors and thus make shopping equally convenient at all sites that share the service.

This kind of thing is exactly the niche that venture capital is looking for and as I've stated before I think systems that start displacing the existing financial mechanisms are a major opportunity. Paypal is an example, it can link directly to bank accounts. New forms of currency such as gift cards are evolving. Which means if you get there with one of the standardized forms consumers have filled out, you have lucrative opportunities.

So I expect within a few years that ease of data entry will not be such an advantage for companies like Amazon.

Especially because individuals such as ourselves can announce what we want, drop it in strategic places such as the comments for this blog and the handful devoted to venture capital with high hopes that if it has potential value someone will pick up on it.

Posted by: David Bennett | December 30, 2004 05:04 PM

One category very important in your wish list is location. Obviously for cars, but also to avoid delivery costs and to supprt local business.

I would remark that for those interested in instigating such changes this article is a good starting point and linking to it in various discussions increases the odds the ideas will become a common place among those defining the future products.

One important aspect of the new medium is "feedback," be it reputations systems or more sophisticated discussions. Those who search out what people are saying and encourage it have advantages. Not just by improving product, but because loyalty is increased when people can "give."

There are features of markets that have been ignored by conventional models but which may prove crucial.

Posted by: David Bennett | December 31, 2004 02:03 PM

Iwould argue that TSCM would benefit (rather than suffer) from the category killer trend (i.e. stock market info, trading color, etc) b/c it has a concentration of market professionals I haven't found elsewhere...

Posted by: Wayne Collette | January 2, 2005 04:04 PM

Post a comment