Behind the gloom, continuing audience growth

By David Walker (Google profile)

A year after the dot-com crash, in mid-2001, your columnist found himself talking with a group of masters students at Melbourne's RMIT University about conducting business on the Internet. Several of the group touched on the same question: now that the boom has passed, isn't it hard to find retail customers on the Internet?

The question came as no surprise. Pessimism about the Internet audience may have been taboo in early 2000, but a year later it's standard.

The cause of the gloom is obvious. The Internet industry had four years of wild experimentation up to April 2000. During that period, most of the industry talked itself into the ridiculous belief that almost all its experiments could succeed, and that a "new economy" would be created in the process. Now the results of those experiments have arrived, and judged by those mighty pre-2000 standards, most of the news is horrible. Should you spend $A200 million on a site full of trendy clothing? Europe's Boo.com showed that's a disaster. Can an online retailer succeed by building its own delivery network from scratch? Failing efforts like the US Webvan and Australia's dStore suggest not. Will viewers flock to watch jerky, postage-stamp sized video on the Web? The fall of Psuedo.com says, loudly, "no". And in between reporting these implosions, the old media's business pages chronicle the tough times at those Internet "blue-chips" Amazon and Yahoo.

It's a familiar pattern. The consultancy Gartner Group long ago pointed out that new technologies travel along a "hype curve", experiencing an early boom as their possibilities are realised, a collapse of confidence when the technology's limits inevitably appear, and then a slow regrowth after everyone turns their attention elsewhere. Right now the Internet industry's confidence has fallen to somewhere near the lowest point of the hype curve. So people ask whether a commercial Internet offering can find customers.

And yet finding retail customers on the Internet is getting easier all the time. Finding people of all sorts on the Internet is getting easier, because more and more people are coming online. And retail commerce is getting easier still, because more and more people are getting comfortable with the idea of using the Internet to do things.

You can find your own anecdotal evidence of this. I certainly can. My father now shops for old travel books on eBay. My PC-illiterate neighbour dropped over last week to find some real estate information on the Web. My seven-year-old checks the weather forecast on the Web each morning. Habits are changing - not in an Internet revolution, but at the normal slow, steady pace of human behavioural change.

Forecasts tell the same story (though you should take them with a grain of salt). US tax authorities expect 35 million US tax forms to be lodged online this year, up 20 percent on last year. Jupiter Research's latest Online Consumer Survey suggests the proportion of US households online will grow by four to six per cent a year up to 2005, when fully 74 per cent of households will have Internet access; European and Australian projections show similar growth. Jupiter also reports Internet use is eating into television viewing and newspaper reading time, and classes 40 per cent of Internet users as "shoppers" - up sharply from 1999's 31 per cent.

But never mind the anecdotes. Figures have now begun rolling in for the 12 months since March 2000 - figures which confirm the Internet plays a growing role in people's lives.

• More people are using the Internet. US figures from Jupiter Media Metrix show that "unique visitors' - a coarse measure of the Internet user group - grew by around 10 per cent between March 2000 and February 2001. (Growth is much stronger in a number of other countries.) US unique visitor numbers rose particularly strongly in January and February of 2001. As Jupiter points out, this was just when the "end of the Internet" gloom was at its strongest. Many dot-coms may be dying, but in the US the users just keep on coming to the sites that remain. And what's true for the US has in the past generally held true for Australia too. The growth in Internet users continues to slow in percentage terms, but that's partly because so much of the potential audience is now online - more than half of all adults in the US and Australia.
• The Net is becoming a preferred source. When US Internet users are randomly surveyed, they say the Web is a more important news source than newspapers, by a three-to-one margin, according to Lyra Research. Some 46% also said they'd spend more time on the Internet if they had more free time - ahead of TV (29%), books (11%), reading the newspaper (5%) and magazine reading and radio listening (3% each).
• As users get used to the Net, they shop more. Now that so many people are online, activity matters far more than raw user numbers. The analysts at Jupiter focus much of their attention on the strongly-growing group of "veteran" US Internet users - people online for two years or more. These people show "a markedly higher propensity to shop online", the Jupiter analysts claim in a May 2001 report. Jupiter reckons it can judge trends in online commerce from statistics on the use of "secure mode" at retail sites. And such use soared from 24% of US users in January 2000 to 45% in January 2001. A 36-country study from Taylor Nelson Sofres in early 2001 reportedly showed 15 percent of Internet users around the world shopped online in the past month, up from 10 percent a year ago, with books, CDs, clothes, groceries and holidays the most-bought items.
• Online shopping is still small, but booming. Management consultancy Boston Consulting Group (BCG) rates the Web as the fastest-growing retail channel in North America. It reckons North American online retail revenue grew 66 percent in 2000 to $US44.5 billion. That's still less than two per cent of all retail sales, but it won't be for long at that growth rate. BCG expects online retail revenues to reach $US65 billion in 2001. Online favorites include computer hardware and software, travel, and books - more than one in every ten books bought in North America in 2001 was bought online.
• The Internet is carrying far more data. Internet backbone traffic continues to roughly double every year, a trend that has continued into 2001 according to MIT researcher Andrew Odlyzko. Mere annual doubling of traffic seems almost tardy when measured against some of the reported growth rates of the boom years. But Odlyzko's paper proves those earlier reported growth rates were largely myth, and then points out that annual doubling in traffic will have a massive impact over just a few years. (While user growth is slowing, data is moving faster and users are staying online longer - hence data traffic continues to grow at much the same rate as ever.)

It's hard to see this cheery news right now, when the dust from collapsing dot-coms still covers the landscape. The continuing growth of Internet usage was barely newsworthy by the end of the dot-com boom, and it's certainly not newsworthy now. It will command far fewer column inches than the process of picking through the wreckage of Scape, or the prospect of layoffs at Yahoo. (There's also a sudden shortage of commentators who can credibly talk up the present-day Internet; they're all in hiding after so wildly over-hyping its potential during the boom years.) But the good news is there, all the same.

Back in February 2000 - at the height of the boom - an article on this site suggested that the competition between masses of foolishly overfunded commercial sites was beggaring all of them. Now that effect is reversing. As the dot-com experiments come to an end, the money dries up and commercial sites get funded on their merits. If the Internet makes sense as part of your business, now's the time to build an Internet presence. Most of the competition is in retreat, services cost less, the formulas for success are clearer - and the audience just keeps growing.