– 19 April 1999
2
The reasons the three consumer online revenue-drivers are
in different phases of maturity, in our opinion, are as
follows: In the beginning, there were the first Internet
users—who used the medium primarily for text-based
communication. Once enough users congregated to form a
critical mass, media companies and merchants rushed in,
eagerly seeking eyeballs and wallets. Once there were
enough media-services, advertisers, and merchants to
command the attention of the users, the users began to
consume media and buy things, and once they began to do
so (and talk about the experience with friends not yet
online) they attracted more users, and so on. Looked at
another way, in our experience, one of the first things
people do when they get online is start e-mailing their
friends or business associates (communicate). Sometime
later, they begin to do research and read news (consume
media). Then, ultimately, about a year after going online,
they eventually begin to buy things.
With only three of the major Internet content companies
having reported Q1 earnings (Yahoo!, Infoseek, and
Excite), it is obviously premature to draw any concrete
conclusions about the overall growth of the Internet
advertising market. Based on the first few results,
however, it seems likely that this year's Q4-Q1 sequential
growth will be less than last year's and might even decline
(Yahoo!'s advertising revenue grew only 3%-5%--and
benefited from international growth; Excite's and
Infoseek's revenue declined). Although Q1 is typically a
slow quarter for advertising revenue across all media, the
online advertising market has never failed to grow
sequentially (last year's Q4 to Q1 increase was the slowest
sequential increase of the year, but it was still an increase).
If the market is beginning to adopt more typical seasonal
patterns, this is by no means the end of the excitement for
companies that benefit from Internet advertising. The
market is still growing nearly 100% per year, and almost
all of the leading public companies are gaining share
relative to the rest of the market. What a change in the
growth phase of the market might mean, in our opinion, is
that relative market-share gains among the leading
companies might become increasingly important: instead
of the tide lifting all boats, the boats will have to compete
more aggressively with one another. In such a case, we
would seek to invest in those companies that are steadily
gaining share.
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