RealTime IT News

As U.S. Market Matures, Shakeout Looms

With Internet stocks heading toward the next millennium on a huge roll, it's understandable if some Net investors feel as if the good times will continue indefinitely.

But a study showing that growth in the U.S. Internet audience has slowed markedly since 1995 should serve as a new warning to investors to make their Web bets wisely.

Results of the survey, by Internet market research firm Cyber Dialogue, shouldn't come as a shock. At some point the runaway growth rate for Internet usage in the U.S. has to level off; that's what happens when markets mature. It happened to the television industry in the '50s and '60s, and it happened more recently to the PC industry.

For Internet companies, this gradual maturing of the U.S. market has two major implications:

1) It means the most room for growth can be found in international markets, many of which are further behind on the Internet adoption curve than the U.S.

2) There will be less emphasis on attracting new "eyeballs" in the U.S. and more emphasis on keeping current customers, as well as better "monetizing" them. Or, as one Cyber Dialogue executive puts it, "The name of the game today is to increase your share of online customers' wallets, not just your share of eyeballs."

Not surprisingly, the companies best positioned to take advantage of these new ground rules are the market leaders.

America Online (AOL), Yahoo (YHOO) and other major players already are aggressively moving into Europe, Latin America and Asia. Sure, those markets are there for anyone to enter, but smaller Internet companies lack the marketing muscle of the Net giants. And they need that promotional firepower even more, since they trail in brand visibility.

Customer retention really comes down to two things: Providing value and quality customer service. To customers, value usually means lower prices. Price wars are usually won by the largest competitors -- such as Amazon.com -- who can afford low (or even negative) gross margins for a longer period of time.

And while any company can (and should) offer good customer service, the bigger players are in better position to allocate more resources (people and software) than the smaller Net firms.

For those smaller players to compete, they must better define their target markets, rather than engage in an eyeball competition. Only then can they hope to offer more value and better customer service than the Internet behemoths.

The bottom line, however, is that second-, third- and fourth-tier Internet companies that can't demonstrate continued strong revenue growth will be punished more severely than ever as the U.S. market tightens.

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