INSIGHTanalysis: The Internet Approaches Maturity

“The initial hype around the internet has now been replaced by an understanding among marketers that this medium is effective, efficient and a smart part of a media plan.” Scott Schulman, Wall Street Journal.

The internet is one of the youngest and fastest growing media in the modern world and there is little doubt that it has revolutionised the communication of information. When the net went mass market, media companies and marketers rushed to embrace the technology and cash flowed in. Few realised that the child was being forced to grow up too quickly.

The phrase ‘new media’ is now something of a misnomer given that the world wide web has been with us for about a decade and digital technology has long since entered the mainstream. However, in the late nineties it was this newness that drove hitherto responsible media businesses and venture capitalists to invest recklessly in online projects.

Growing pains It ultimately transpired that the medium was not fully developed and scant consideration had been given to workable business models. The downturn, when it came, was sudden and painful with company failures, a decline in online advertising and a withdrawal of investment.

In the intervening period since the dotcom slump, there has been much soul searching and web strategists have struggled to identify new sources of revenue during a particularly difficult period for the media sector. Even so, the internet has not stood still and increased usage together with the emergence of high-speed networks have made it a more attractive proposition than ever before. If anything is new, it is the sense of reality that now permeates the thinking of online planners and advertisers.

Regional variations The United Nations estimates that the number of global internet users increased by 30% to 655 million in 2002. This is equivalent to one-tenth of the world population. Approximately a quarter of the total are based in the United States so it stands to reason that the country is the primary trend setter.

However, the US experienced just 6% growth in 2002 and eMarketer has speculated that US internet penetration will peak at 75% to 80% as a certain segment of the population have no desire to go online.

Given this prognosis, it is reasonable to assume that there is greater potential in other markets. In its recent report, Europe Online: Access, Demographics & Usage, eMarketer claims that the number of internet users across the continent will increase by 20.5 million to 196.2 million by the end of 2003. However, much of this growth is occurring in the developing markets of Eastern Europe and like the US and parts of Asia-Pacific, many countries now have highly mature internet audiences.

The broadband effect With many markets approaching saturation point, ISPs have switched their focus from trying to attract new business to extolling the merits of broadband access to their existing customers. Broadband connections enable high-speed internet access and have been shown to increase usage and encourage activities such as online shopping and gaming.

Broadband uptake is particularly high in the Far East, notably in telecom-friendly South Korea where two-thirds of the population have a high-speed connection. However improving services and falling prices are now boosting broadband subscriptions in other parts of the world.

Morgan Stanley predicts that 2003 will be the first year in which there will be negative growth in the paid dial-up market in the US. Only about 27% of the country’s internet homes currently subscribe to broadband but this is expected to rise to almost 70% in 2008. This will come as a welcome relief to telecoms companies but raises difficult issues for struggling dial-up providers such as AOL.

The broadband upsurge has been equally profound in Europe where prices of around €25 to €30 per month have been shown to drive subscriber acquisitions significantly. Sweden, Germany and France have been at the vanguard of this revolution but the UK is gaining ground, due in part to a 27% reduction in DSL prices during the first half of 2002. According to the Yankee Group, there will be 41 million European broadband households by the end of 2006 and the market will be worth in the region of €17.8 billion, up from €4.7 billion last year.

Online ads back in fashion During the well documented advertising recession, marketers largely abandoned the internet in favour of traditional media. However with the media market showing signs of improvement, the web is becoming an increasingly useful tool. New ad formats together with relevant and accountable metrics have helped to raise its profile and agencies and brands now appreciate that the internet offers unique and value for money opportunities.

As ever, advertisers are keen to get their message across to the affluent and this would seem to make the internet an ideal medium. According to a Harris Interactive poll, 40% of US web users come from households which earn more than $50,000. Marketers would also be well advised to target the work population as research has shown that over a third of employees go online regularly in the office and 50% of these have salaries in excess of $75,000.

Given these circumstances, it is no surprise to learn that after two years of declining online ad revenues, US researchers are generally agreed in predicting growth for 2003. eMarketer estimates that by 2005, expenditure will reach $8.1 billion, a figure not seen since the dotcom heyday of 2000. Meanwhile in the UK, Initiative Media is predicting that online adspend will increase by almost 50% this year although OMD is more cautious and states that internet advertising will be worth £180 million, a 5.3% rise.

Other revenue sources While advertising still accounts for the lion’s share of internet revenues, there is a growing market for paid online content. Jupiter Research estimates that consumer spending in this area will increase by 30% to $2 billion in the US this year. A survey of internet users in Western Europe found that 59% would be willing to pay for downloadable content.

As they become more experienced, web users are also showing greater enthusiasm for online shopping. Concerns remain over security and privacy but in many cases, these are outweighed by the sheer convenience of internet transactions. US online retail sales (excluding food services) topped $14 billion in the final quarter of 2002 and totalled $45.5 billion for the year. The market in Western Europe is still in its infancy but was worth almost €40 billion last year and is set to undergo major expansion.

Although essentially a sector in itself, the B2B e-commerce market is the most lucrative of all and accounted for $823 billion of business across the globe in 2002. eMarketer predicts that revenues will treble in the next two years as more players come on board.

Conclusion After a difficult adolescence, the internet is now firmly established in the hearts and minds of businesses and consumers alike. While there was never any doubt about its value as a resource, its power needed harnessing and directing. Advertisers and marketers now see the web as an opportunity rather than a threat and improving technology is enhancing its value all the time. There is every reason to believe that this growth will continue into adulthood.

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