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Tech Industry

Don't rush to judge on the Net

Investors are attributing greater stability to today's market leaders than is merited. A snapshot of the end of the first mile of a marathon may tell us a lot about that particular point in time, but it gives us very little feel for who ultimately will win the race.

If I announced my intention to launch a new portal site to compete with Yahoo, or to develop a better e-commerce book site than Amazon.com, I wonder how many people would take me seriously.

It's just a guess, but I bet my ideas would go over like an Apple Newton.

That's because some people are blind to the lessons of the past, particularly the lesson that market innovators are not always market leaders as an industry matures.

Basic theories behind market evolution hold true even in the Internet Age. History provides numerous examples: Ever heard of a company called Burroughs? It was the early and dominant leader in the office-machine industry in the 1920s, a time when IBM was on the verge of liquidation. More recently, the Fox Network took by storm the mature, staid broadcast world, establishing itself as a strong competitor.

If slow-evolving industries can see such dramatic shake-ups, why should anyone expect less in an industry evolving at warp speed?

It wasn't long ago that Netscape dominated the browser market. And in the portal space, Lycos has seen dramatic market-share growth, from 12 percent at the beginning of the year to around 42 percent today. Lycos now is only 8 percentage points behind the market share of Yahoo, whose reach has remained constant at around 50 percent.

Few would have considered Infoseek a contender for second place in the portal wars--let alone first place--just a few months ago. But as details about Disney's pending deal to take a 43 percent stake in Infoseek emerge, the notion of an Infoseek upset is looking more and more feasible. With the reach and brand strength of Disney, ESPN, and ABC, as well as the projected marketing commitment for the new brand, Infoseek could quickly take market share away from today's leaders.

It seems to me that investors are attributing greater stability to today's market leaders than is merited. A snapshot of the end of the first mile of a marathon may tell us a lot about that particular point in time, but it gives us very little feel for who ultimately will win the race. The same can be said of the Internet, particularly at this relatively early stage in its development.

So before we decide who'll be the winners and losers, let's remember a few things:

First, the Internet is evolving at a pace that, for most companies, is unsustainable. A stumble or a missed transition could turn today's leaders into tomorrow's roadkill. Theoretically, Netscape should be on a par with Yahoo, but instead its market capitalization is $2.5 billion, vs. Yahoo's $14 billion.

Second, early adopters of new technology tend to be mavericks, while mainstream consumers are most likely to default to the easiest solutions and most established brands. So the initial failure of traditional players to dominate the emerging online medium should not be taken as proof of their inability to ever succeed. Their brands--many of them with decades-old history in the offline world--are still better-known among mainstream consumers than Web brands, and, in the long run, this recognition could matter more than having a better product.

Third, the roll-out of faster, higher-bandwidth services over the next five years could produce a new crop of leading portals and content providers. Unlike the largely text-based content available on the Web today, compelling content in a broadband environment will include more pictures, videos, and sound. This transition could prove as difficult for today's leading Web players to handle as the transition to the mostly text-based Internet was for traditional media players.

Despite these words of caution, I do not see any imminent threat to today's online leaders. They are dominant because they have done a superior job building their brands online and navigating a volatile environment. As more time passes, the pool of potential competitors will shrink and today's leaders will become more entrenched. Those that are left in the pool, however, probably possess established brands and/or ample financial and strategic resources to continue competing. Brick-and-mortar competitors strengthening their positions through acquisition or investment--such as Disney and Infoseek, Nielsen and NetRatings, and CBS and SportsLine--or well-backed upstarts entering established sectors, can establish themselves quickly.

The key is to not confuse early success with long-term viability.

Andrea Williams is a principal and a senior analyst covering Internet content companies at Volpe Brown Whelan. Prior to joining Volpe, she served as a management consultant at McKinsey & Co. and at Theodore Barry & Associates.