Dear Internet Industry: Brace for Hard Times

Sooner or later, all good times come to an end, and Internet companies may soon be facing some headwinds.  (Attention Alley start-ups: This means you).  Four major factors have helped drive of the industry's remarkable resurgence over the past five years:

1. Lack of competition, as Big Media retrenched and Bubble 1.0 start-ups croaked en masse
2. Rapid adoption of broadband
3. An economic boom and strong stock market
4. A massive shift of advertising dollars online.

Five years later, the situation has changed, and the power of all four of these trends to drive continued industry expansion is weakening.

Increased Competition.  Two weeks ago, we noted that no fewer than 68 start-ups had debuted at the Always On conference.  68!  Our daily reading, moreover, reveals a steady barrage of new companies, each of which inevitably already have several competitors.  True, they don't usually have 5-7 competitors, as in the 90s, but they have competitors, and that means pricing pressure and fewer users to go around.

Slowdown in broadband adoption rates. The growth of US household broadband penetration has passed its peak, with more than 58 million U.S. subscribers now online. Penetration rates, moreover, are now slowing (Om Malik had a nice write-up on this yesterday).  Sure, one day, nearly all households will have broadband.  But diffusion rates tend to slow dramatically once you've passed the halfway mark (just as dial-up penetration did), and we're now past halfway.

Economic boom may turn to bust, bull market to bear.  It's just easier to do business in a boom than a bust, and there is at least a reasonable chance that we're now headed for the latter.  Also, even for tiny private companies, financing is far harder to come by when the public stock market is tanking.

Slowdown in shift of ad dollars online?  As discussed yesterday in The Great Ad Share Shift: Google Sucks the Life Out of Old Media, online companies have grown their share of the overall ad pie at a furious rate (7 percentage point increase in one year, among the companies we analyzed).  The bad news here is that the more share you gain, the less you have to go, and the rate at which the industry is gobbling share will eventually slow.  Also, as hedge-fund manager Jason Jones pointed out yesterday, one of the bullish arguments about ad-dollar shift has always been that online usage accounted for, say, 12% of all media consumption time, but only, say, 7% of all dollars.  Well, thanks to the rate of the recent shift, whatever today's exact numbers are, the gap has probably closed.

Does this mean "brace for catastrophe?"  No.  Thanks to international, mobile, broadband, innovation, generational changes, et al, there is plenty of long-term growth left.  What it does mean is:

1) plan for hard times (and hope you'll never have to use the plan), and
2) raise more money than you think you'll ever need--now, while you still can.