The Internet Infrastructure Gap
The underlying need for an improved Internet infrastructure, especially for new services that enhance Web surfing and online commerce, is becoming more and more apparent.
Causes of the infrastructure gap include the explosive growth of Net companies, a domino effect whereby more and more traditional companies embrace the Net as a sales medium, and a musical revolution powered by a new digital technology. The result is the obvious need for greater capacity that fuels innovation.
Below, a closer look at these causes and some of the companies affected by the infrastructure gap.
• Explosive growth. The incredible growth of online leaders such as AOL, Yahoo, and Amazon.com highlights the need for a more robust set of technologies for the basic operation of the World Wide Web, especially if one expects that other Web companies will follow leaders and rocket to mainstream adoption.
For instance, companies such as VeriSign, a maker of digital certificates for securing and authenticating online transactions, should continue to enjoy huge demand. VeriSign already counts more than 400 of the Fortune 500 companies as active customers.
Similarly, we expect Inktomi to see strong sales of its search engine and traffic server technologies. At planet.wall.street we learned that both AOL and @Home have fully deployed Inktomi's traffic servers. These companies will need to expand their Inktomi licenses to handle traffic growth.
Another highlight was Sandpiper Networks, which sells technology to help online publishers process heavy content loads. We expect Sandpiper to be a big beneficiary of the move to more media rich content.
• Domino effect. Day-by-day an increasing number of household brands such as Levi's are aggressively embracing the Web as an e-commerce and customer-relationship medium. These traditional brands are in many respects playing catch-up on the Internet and thus turning to infrastructure companies as partners to get online.
Clearly, USWeb/CKS is one of the major beneficiaries of this trend as the company continues to be the only professional services firm with critical mass (over 2,200 professionals) focused on the Internet.
Another player well-positioned to benefit from the domino effect of the Internet is privately-held Motive Communications, a company focused on providing what we believe to be one of the most compelling solutions for Web-based technical support.
• A musical revolution. The Internet is continuing to radically upset the relationship between vendor and customer. What Amazon.com did for books and Dell did for computers, other companies will soon do for other industries.
One of the more fascinating examples of what lies ahead is MP3.com, a leader of those who aim to use the Web to "disintermediate" the music recording industry. In the face of opposition from top record labels--which fear MP3-based piracy--MP3.com CEO Michael Robertson has quickly built an impressive company.
Since its inception in November 1997, MP3.com has become the top MP3 destination site on the Internet, with 250,000 registered users, 300,000 to 400,000 downloads per day, and a stable of 2,000 artists and 120 independent labels. The company sells MP3-based recordings and CDs that musicians upload to its site, and collects half of the proceeds as a commission.
MP3.com offers an attractive proposition for local bands and other musicians shunned by major labels, an effective means to sell their music to a global audience. It also offers consumers access to a broad range of music unavailable in any music store.
Those features, in themselves, make MP3.com a promising business. But the real opportunity is much bigger. It lies in MP3.com's potential to become both a record label for the stars and a record label for everyone else.
One way the company could do this is to convince major artists to defect from top record companies and leave behind the labels' notoriously restrictive contracts, the other way is to create its own stars. Significantly, MP3.com has made at least some progress in getting attention from the stars. Its site distributes music from Tom Petty, and funk star George Clinton. MP3.com also has the potential to create a new music star via the grassroots power of the Web. Its recordings are sorted by popularity, measurements that elevate the most requested recordings to the top of MP3.com's genre-separated index.
Meanwhile, MP3, which compresses audio recordings into a digital format for downloading over the Internet, is showing true Internet staying power. The technology is the second most popular keyword in Web search engines (after sex). Pirated MP3 clips of virtually every top artist can be found online, much to the labels' chagrin.
To be sure, MP3 files can be a bandwidth hog. As a result, most MP3.com customers download music from high-speed Net connections at work. But as home-based broadband services proliferate, MP3.com stands to benefit--and the company's continued success underlines the need for improved infrastructure.
This column is not a recommendation to buy or sell stocks or to solicit transactions. At time of publicaton, Hambrect & Quist LLC may be a market maker and/or have investment positions in the companies mentioned in this column. It may also have been an underwriter for these companies within the last three years.