The Future of the Internet

The consensus of public opinion seems to be that the internet will grow and it’s impact on our lives will only increase. While this may indeed turn out to be true, I believe that the possibility also exists for the internet to shrivel up and contract significantly. We may turn out to be experiencing the Golden Age of the Internet, and not realizing it.

The reason for thinking this is that age old problem - someone has to pay the bills. As it stands now, relatively few internet related businesses are money-making concerns. Most are living off their venture capital reserves, as investors poured money into their IPOs with the expectation that down the road, when the internet is the way of life, the companies that start up now will be making money hand over fist. But in many cases these expectations have already begun to sour. As an example, Priceline.com saw its stock price drop from a high of about $104 last March to about $6 a share now. Many of the most celebrated internet businesses (e.g. Amazon, Egghead and the like) have never made a profit and may not any time soon.

So what happens if it turns out that the internet, great as it is, is not tremendously suited to making money? Or, more significantly, even it can make money, if it cannot make money to the extent that the venture capitalists thought it could? I would think it’s only a matter of time before many of the e-businesses begin closing up shop. This will have a ripple effect. Many websites derive their main source of revenue from advertising. The advertising is typically for some e-business or other. If there is a significantly reduced number of e-businesses willing to pay for advertising, this source of revenue will dry up.

Furthermore, there are many establishments that have rushed to get on the internet bandwagon without a clear plan to make money out of it. These entities feel that they must “go digital” in order to survive in the 21st century. (My understanding is that the Chicago Reader maintains this website for similar reasons). If, when the dust settles, it becomes apparent that digital is not the wave of the future (business-wise that is) these establishments may reduce their presence as well.

One counterpoint is that I once saw in some article (NY Times or WSJ) that one reason that e-businesses have such a difficult time making a profit is because the ease of price shopping on the net means that the established concerns can never raise prices because of the risk of being immediately undercut by new startups. This problem may be eased if the venture capital dries up for new businesses. But in any event, this scenario too presupposes that the net will shrink.

I guess my point boils down to this: The net cannot survive at all under the present (internet) economic conditions. Something has to give. Until we know what this something is, it is a mistake to predict the future based solely on advances in technology.

Coincidently, I’ve just seen this article which supports some of the points that I’ve made.

It sounds like you are saying that when the unprofitable startups are gone the internet will somehow vanish. Where’s it gonna’ go? The internet’s not going anywhere, just the companies with nothing new to offer.

Did the stock prices drop? Well, it’s no big secret that most internet companies were over-valued anyway so what’s the news in that? The companies that are well-managed and mature will have no problem maintaining their presence on the http://www. All it takes is a permanent connection, a really fast hard drive and a part-time tech guy/administrator. Someone will need to enter product updates occasionally, but if the site is well-designed and relatively static that chore shouldn’t be too difficult for anybody off the street to handle.

If Amazon hasn’t made money by now, it’s their own damn fault. I used to buy all sorts of stuff there until they notified my that they decided to change their policy about selling the information they had gathered about me to third parties. And then we find out that they are charging their customers different prices depending upon some sort of e-demography. I hope those bastards do go belly up.

Anyway, I still shop at most of the same places I shopped before the advent of the internet frenzy. Now it’s just easier and it saves the company $$$ because now they don’t have to mail millions of catalogs and staff dozens of people to answer the phones and describe in minutae whatever product &/or service I’m considering. Stick it on the web page and I’ll get a better description and order from there.

Apparently you can’t put three w’s next to each other without it getting translated to a web address. Oh well.

The 'Net can and will survive even if the present economic conditions continue. Just as in the opening of any new market, there comes an intial boom and explosion of new business and industries. As the situation begins to sort itself out, those companies and industries that are not able to compete are ‘weeded’ out.

There’s no question that the initial predictions for the Internet will not come true. In economics, the predictions are never completely accurate, a close approximation is the best one can do. As the first blush of overoptimistic expectations wears away, (which we are watching now, go NASDAQ), the standards for the companies will come more into line with the traditional indstries. The internet can be extremely profitable, when the situation and the product/services match up properly. It is not, however a universal solution to each business.

As far as advertising goes, it’s difficult to be a large company without some sort of web presence. The Internet puts more information at the hands of consumers than ever before. That is a situation that can and will be exploited for economic gain. The only question is the form in which it takes, not that it will happen.

Then you also have to consider that not all Internet traffic is e-business. The grand majority of the sites Ive(not that I consider my self typical) visited are “content oriented” not e-tailers (in fact Ive only purchased airline tickets online). I’d also be surprised if the Brick and Mortars (who’ve already got the necceary funding and infrastructure)fail to continue moving online.

inertia

Not vanish, but possibly be reduced, as funding dries up for the many websites currently out there.

I don’t know if it’s news but it is significant because, as I pointed out, the companies are currently living off the proceeds of these stock sales. Eventually this source of income will dry up, and it’s not likely to be replaced.

This is speculation, as few have done it so far. My position is that it is possible that this specualtion will ultimately turn out to be incorrect.

Ankh_Too

I am aware that the phenomenon that you refer to takes place. I once read somewhere that there were at one point hundreds of car companies in the US. But was there ever an industry that was in aggregate such a massive money loser? I wonder.

If true, than that doesn’t seem to happen very often.

stuffinb

Not sure what you mean by this distinction. But as relates to my point, was the place that sold you the airline tickets making a profit (on their internet division, at least)? If it is typical than it is not. And if so, it is not likely to keep on continuing to do business in the same form without some changes.

Well take the SDMB for instance, it doesn’t advertise (well except the reader) it’s content oriented. Same for private individual run sites. Oh and don’t forget porno.

In the case of the airline tickets (southwest btw) I’d have to assume that they made a profit, as the goal of all airlines is to fill all the seats of the plane. They lose money on underbooked flights because the fuel prices remain unchanged whether the planes full or not.

Let me ask for clarification. Are you saying e-commerce is dying or do you mean the internet as a whole? See, I use the internet mainly as a resource tool, e-commerce to me is a side benefit, and if it disappeared, well it just would make that great an impact. But the power to stay connected to people around the world, to look up information from various sources, that to me is the real internet.

I mentioned before that the SDMB is run at a loss, because of the feeling of the CR people that it might one day be useful to have a web presence. This attitude might change. Most private websites cost money, make money from advertising, or are subsidized by other entities that are supported by advertising. But to reiterate, most of those advertizers are themselves losing money. (See my earlier link to the AP article about Yahoo.)

Porno will always be around. I once read a NY Times article about an internet entrepeneur who claimed to have tried all sorts of internet ventures and discovered that only two are truly profitable - paid porno sites and registering (and holding for ransom) domain names. (Obviously there are many exceptions to this).

I don’t think your assumption is valid. Priceline.com works under the same principle, and it consistently loses money. I once read a WSJ article about a company that maintained a website but refused to sell anything on it, haveing done a study which showed that the potential costs outweighed the benefits.

Neither. E-commerce is not dying just yet. But it has yet to establish its viability, so there is some doubt as to whether it will exist in the long run on the scale that it does today. Because e-commerce pays the bills for the internet as a whole, this translates into doubt as to whether the internet as a whole will exist on the scale that it exists today.

Great for you (and me as well). But nobody is interested in what we like. If it is not financially viable it will shrink to the point that it is.

But the difference here is Southwest was selling their own tickets, Priceline is selling everyones tickets. Priceline can lose all the money they want, but the Airlines would have opted out at the beginning if it wasn’t viable for them. That’s why you have so many travel agents. It’s in the airlines interest to have as many sources for the purchase of tickets as is possible. Also why you get overbooked flights, btw.
I think I read the same NY Times article. I also read recently that Amazon could actually turn a profit if it didn’t try to be everthing to everyone. Shipping a lawnmower isn’t the same as shipping a book. Amazon loses money due to their shipping arrangement. They have four distribution centers and oders are routed to the closet stocked distribution center. This is too much overhead. They also have a tendency to multiship orders breaking them into smaller peices, this also raises their cost.

I believe Amazons problem are typical of internet startups. My wifes Internet company had the same problems till they merged with another company and combined under one distribution center.

Most of the problems with Internet companies seemed to be that the “Money Men” did a poor job of evaluating business statements. Poor plans, are routinely routed out in conventional sitituations.

The way I see it, there’s not really anything inherently wrong with e-commerce. The same businesses that market on TV, would be able to market via the web just as effectively. The problem was poor planning.

I don’t think the airlines would necessarily opt out if they are losing money. People see the net as the wave of the future, and feel they must establish their business on the net in time to compete with the e-businesses, or be ultimately crushed when the internet becomes the way of life.

It’s concievable, for example, that Barnes & Noble is losing money on its internet division, but feel they must maintain it or be destroyed by Amazon. Should Amazon ultimately fold, B & N might close their electronic division as well.

You may ultimately turn out to be right. But there’s no way to no for sure until things start changing in a positive direction.

I agree on the plausibility of the theories posted by IzzyR in relation to the potential danger menacing e-business. I disagree however on your proposal that it will cause a domino effect that could affect the Internet as a whole. Many non-profit making organizations and interested individuals will continue providing content-oriented material. Besides, there are other sources of advertising revenue aside from the ones stemming from e-commerce ventures.

Further, advertising is only the most tangible form of making your business profitable. A web presence transcends the moneymaking schemes implicit in advertising. Take customer service for example. By providing a well-structured technical support initiative on the Web–expert systems, FAQs, the customer can easily work out their problems without going through the inconvenience of all the bureaucratic procedures plaguing your company. This, in turn, allows for the decrease of your customer service staff, thus driving your operational costs down.

On the specific example of airline ticket sales, according to the 1999 World Almanac, if you purchase a ticket through a travel agent it costs the airline $8, as opposed to the 1 lousy buck that an online purchase would cost. Which makes pretty good sense since you don’t have to pay them a commission for acting as intermediaries between you and your customers.

One question

It has always amazed me that Amazon is losing money, since it appears–from an outsider’s point of view–like they are a very profitable organization. Do any of you know what is the cause(s) for that seemingly paradoxical occurrence?

Addressing the OP:

I think your definition of what “the Internet” constitutes is extremely narrowminded. Many people believe, erroneously, that the Internet is simply commercial web sites. That’s not true. The Internet is a fundamental shift in how the world will interact with ideas and intellectual property, and what we’ve seen so far is hardly a “golden age” it’s the very, very, very tip of the iceburg.

The Internet’s contribution will NOT be primarily in delivering goods and services. It will be in the unlimited distribution of ideas, and making sure that the ability and right to maintain distributable media is an issue about which I am deadly serious.

Anyhoo, regarding money: It doesn’t matter. Where there’s a market, there’s a way, and there’s always going to be a market for information.

There’s one distinction that I think should be made here. E-commerce is not the same as e-business. In my humble opinion, e-commerce is the use of the internet/WWW as a sales medium, whether you’re selling to consumers or other business (B2C or B2B). On the other hand, e-business is using internet communication technologies to improve efficiency within your own business or business processes (e.g. adding your suppliers to a wide area network). I’ve seen a lot of e-commerce operations go pear-shaped, but I’ve also seen a lot of companies working much more smoothly by web-enabling processes like time reporting, expense reporting and management information.

I tend to agree with IzzyR on the risks; I think one day a lot of companies are going to realise that without a watertight strategy and an iron fist of control an e-commerce arm is going to lose money. I also agree with quasar that this doesn’t spell disaster for the internet as a whole; it was ticking along quite nicely when I first started using it around 1994, and e-commerce wasn’t the phenomenon then that it is now.

Matt

I favor the conceptual distinction you postulate between commerce and business, the latter, of course, being more general in nature and the former constituting only a single dimension of the overall business scheme, albeit a very important one, it must be stated.

That distinction was precisely the point I intended to make on my previous post, lacking only the conclusiveness and precise segmentation of terms that you so eloquently presented. Anyhow. I am waiting for IzzyR to refute these arguments, as somehow I feel a perturbation in the Force which may very well be indicative that he still has some more tricks up his sleeve.

Well, this may be a yahoo attitude, but I am really enjoying the refreshing change of pace the internet affords. I don’t have to shell out many sheckles to wander the earth for information. I can quickly avoid any hardsell. Maybe the future of the internet is to get us off the track of shiny baubles and onto more meaningful immediate communication, with less grasping outstretched palms.

Naaahhh, what the hell am I thinking?

I’ve been out of the office a while.

Regarding the last few posts, it seems to me that they mostly raise the same points brought up earlier by stuffinb, and to which I thought I already responded. To reiterate - I am not saying that commercial ventures are the most important part of the internet - merely that they underwrite much of it. In other words, that much of the cost of keeping the internet going is being payed by people or entities who feel that they have a prospect of making a profit off it. If that feeling changes, that source of funds may dry up.

Maybe I’m missing something, so perhaps the posters will specify exactly what manner of exchange of information will be taking place in the absence of a potential profit source. Will the Media continue publishing online versions if it becomes apparent that it is not enhancing their bottom line? Will companies sponsor message boards such as this one if the conventional wisdom becomes convinced that it is a dead end financially? If the answer to these and similar questions is no, than we will be missing a large portion of what we enjoy on the internet when a retrenchment comes.

**

Sorry, I believe that’s factually incorrect. The internet was started primarily as a DOD info sharing tool and the government still commands a significant portion. Another big internet user would be colleges. You can find thousands if not millions of research papers online, as well as book excerpts, etc. None of these sources are going anywhere.

As a matter of fact, the government (as in Federal procurement) has been tasked to be completely paperless in the next few years (I put it that way as they’ve already missed one deadline) with all contracting done electronically from solicitation through bid process to award.

**

Does the above count, I believe I can also provide more.

A much better question and one I’m not sure I can answer. But not being hampered with a rule against guessing I’ll do so: As far as the media goes, a large degree of that decision will depend on what they consider to be constructive advertisement. Say ABC news (or the Readers Digest)for instance, i think they find having 20/20 reports available online to be a type of “value added” service. They can present more of the information they collected on a story without the time constraints of “air time” or the cost associated with production. A boon for both consumers and journalistic quality.

As for message boards, well quite a few are tied to ISPs, right? If this is a service that people are showing they want, I believe that the ISP will keep offering them especially since they’ll recieve more of the advertising dollars aimed at the internet anyway, by virtue of having ready made venue. A fair trade off IMHO.

The average internet user doesn’t realize this, but by far the biggest use of E-commerce on the internet is business-to-business transactions. That includes things like General Electric selling massive orders to, say, Ford. Or a local plumbing contractor ordering his plumbing supplies over the internet.

When I was doing IT consulting a while ago, I had a wholesale account. My distributer took all orders through their web page. It saved me a bunch of time, I got instant pricing, and it cut their transaction costs substantially.

Huge companies like General Electric and GM have been investing billions into E-business, and it’s already profitable for them. In the case of GM, their dealerships can go online and order vehicles, complete with all options. The amount of paperwork this cuts down is tremendous, and customers get instant feedback (“I punched in all your options, and it turns out a dealership in Podunk has one already on the lot with those exact options. They’ll ship it to us, and it’ll be here tomorrow.”)

In terms of sales dollars, B2B is almost 10 times bigger than consumer E-commerce. And it’s wildly successful.

The consumer side of things is in for a rough ride, and I’ve been saying that for a long time. There are serious distribution issues and competitiveness issues that most internet companies have never dealt with sufficiently. For instance, if my local DVD store is selling DVD’s at $5 above cost, how can Amazon compete if it costs them $5 to ship the thing to me? If they eat the shipping costs, they make no money. If they force me to pay for them, it raises the price of the product above what I can get it for locally without having to wait.

Some things can be sold on the net with lower transaction costs than retail, and it’s these things that will be successful. Airline Tickets, Concert Tickets, stocks, etc. I ordered some show tickets a while ago from Ticketmaster online. It was a big win-win for both of us. In my case, it took me five minutes to pick out the seats I wanted, order the tickets, and pay for them. For Ticketmaster, they save a whole bunch of transaction costs from not having to tie up a human for ten minutes while we go through all the seating options.

That’s the kind of stuff that will be successful.

So it boils down to saying that “yeah much of what we now enjoy on the net may be gone, but there are still other aspects that will remain”. This does not contradict my central point. I am not maintaining that it will disppear - rather that it may contract instead of expanding. This runs counter to popular thought.