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What's ahead in the Internet space

If 1998 was the year of the portal, 1999 will be the year that more narrowly focused verticals captured investor and consumer mind share.

Last year was a truly spectacular one for the Internet.

Consumer adoption, advertiser commitment, and the acceleration of e-commerce exceeded nearly all expectations in 1998, and ".com" became the suffix of choice for companies of all ages. In 1999, I expect to see a continuation of these positive trends. Here's what I'll be watching for in the new year:

Rise of the vertical players
If 1998 was the year of the portal, 1999 will be the year that more narrowly focused verticals capture investor and consumer mind share. The portals are not drifting off into the sunset, but through growth and/or acquisition, they are morphing into large companies that have different growth characteristics, and ownership structures that necessitate different investment considerations.

Many people already think of Infoseek as Disney, and Excite as AT&T because of their respective partnerships. I believe other portals will follow in securing large telecom and media partners, in order to stay competitive.

As the Internet becomes increasingly accepted as a necessity rather than a diversion, the value of verticals is rising dramatically. The Web has become a key information resource and commerce avenue. Consumers are looking for depth, and only the verticals provide it. Assuming market conditions remain favorable, a host of verticals will go public during the first half of 1999. In the process they will gain additional visibility, resources, and a stock currency that undoubtedly will be spent on marketing and acquisitions aimed at further raising their profile and growing their market share.

Business model convergence
In 1999, content and commerce will come closer together, as the loop between information-gathering and transactions closes. Consumers will force this convergence on the industry by congregating at those sites that provide--in one place--complete and trustworthy information organized to facilitate a purchase decision, as well as commerce capabilities that give the consumer choice with the ability to compare options.

Today, most consumers looking to make a considered purchase must go to one (content) site to get the information needed to decide what product to buy, and then find another (commerce) site to make the purchase. At the risk of appearing to cater to the publisher of this article, CNET is one of the few sites that has simplified the online buying process with a structure that offers consumers the opportunity to explore, evaluate, and purchase products from multiple vendors all in one place. I think will roll out a similar program for a number of categories in 1999.

Continued consolidation as companies look to get big fast
The increasing returns dynamic of the Internet suggests that leading players will garner an increasingly disproportionate share of the business generated online, or at least a premium market cap. In 1998 and so far in 1999 there has been a number of significant mergers, acquisitions, and strategic alliances focused on "getting big fast," including ones between @Home and Excite, Disney and Infoseek, AOL and Netscape, CDnow and N2K, and Bertelsmann and Barnes & Noble. I fully expect to see more consolidation in 1999 as traditional companies in the media, telecommunications, and retail sectors look to buy and/or partner their way online and as current Internet players attempt to create critical mass.

In my opinion, traditional companies are beginning to feel the pain of the Web's rising popularity, as increasing numbers of consumers shift increasing amounts of their time and buying power to the Internet. In 1999, many traditional companies will accept the fact that they need a serious Web strategy in order to be relevant in the future. At the same time, current online participants are focusing more on acquiring loyal users or customers as quickly as possible, positioning themselves for the onslaught of traditional companies, or dressing themselves up for eventual sale.

A sell-off in e-commerce stocks The stock prices of a group of leading e-merchants increased almost 275 percent during the fourth quarter of 1998. Much of that appreciation was based on an anticipated surge in online sales during the holiday season. Now that the holidays are behind us, and investors are facing the prospect of a relative flattening in sequential revenue, I think investors will look to lock-in profits in the commerce sector, particularly among the more marginal companies.

However, investors should be very wary of the potential for price wars, particularly in the crowded hardware and software sectors. OnSale and both have promised to sell at least some products at or below cost. E-commerce companies already face low margins. Price wars will push profitability out even further into the new millennium if not preclude it entirely, and could jeopardize the optimism sustaining the prices of even the mightiest e-commerce stocks.