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Analysts: Growth in Net use may be waning

Internet analysts warn that the most popular Web sites stand to further extend their lead over second-tier rivals in the wake of a report indicating that growth in online usage may be slowing.

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Some Internet analysts are warning that the most popular Web sites stand to further extend their lead over second-tier rivals in the wake of a bellwether report indicating that growth in online usage may be slowing.

Citing a Media Metrix traffic report for October, Merrill Lynch's Henry Blodget today renewed tentative warnings that long-term Internet growth in the United States may be slowing, pushing traffic and advertising dollars into the hands of a few players.

"We don't wish to make too much of this--the numbers are extrapolated from a small sample and, as September illustrated, there is significant month-to-month variance--but we believe it may well be another sign of the flattening of the growth of Web users in the U.S.," Blodget wrote in today's analyst note. "If so, it obviously has several implications for the Internet companies and stocks."

The Media Metrix report showed that the number of U.S. Web users increased 488,000 to 63.8 million in October. Although that indicates a rebound from flat growth in September, Blodget noted that U.S. user growth earlier this year averaged 750,000 per month.

Although Media Metrix numbers are widely disputed, analysts agreed that traffic is beginning to concentrate among a handful of sites.

"The steady trend is that the dollars and usage have been concentrating at the top of the food chain, which has obvious implications for other sites that aren't leaders," said James Preissler, an equity analyst at PaineWebber. "There might not be enough crumbs to feed businesses out there."

Preissler cited figures from a report by the Internet Advertising Bureau as testimony to this market segmentation. In the first quarter of 1999, the top 10 Web properties accounted for 75 percent of total advertising spent online, the report said. This was up from 71 percent in the fourth quarter of 1998 and from the mid-60s in the first half of 1998, according to the report.

As a result, Preissler warned that it's getting harder to be a second- or third-tier player.

"If you're not going to meaningfully move up on the rankings, you should think of other business models," he said.

Blodget's cautionary analysis follows a note issued last month, in which he pointed out that a slowdown in overall U.S. Web user growth could be taking a toll on traffic to Web portals.

Web heavyweights such as Yahoo, AOL, Amazon and Microsoft all showed positive traffic gains in October in contrast to September's numbers, which were flat across the board. Although these traffic figures constantly change, Blodget recommended that investors put their dollars in the top tier sites, which garner more traffic and more advertising dollars.

Whether or not Media Metrix's monthly figures show the beginning of an overall trend remains a point of dispute. Many industry analysts criticize Media Metrix's methodology, given the small sample size that it employs to measure usage.

Despite Blodget's caution, other market research analysts are not convinced by the latest Media Metrix numbers.

"We haven't seen any indication of use slowing down," said Barry Parr, an analyst at International Data Corporation. "We still believe that computer purchases, modem purchases and modem use are strong right now."

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