If you want to make lots of money in Internet stocks, the trick is pretty easy to master. First, you need to find a growing niche. Don't rack your brain over that. I'll nudge you in the right direction by pointing out a few, like online advertising, blogging, social networking, and video streaming. Once there, the next step is to find the one that will enrich the active content contributor.
Enrichment can come from strictly monetary rewards. It can also come from feel-good benefits like status and exposure. The point is that the site that motivates the user to lean on it the most and virally promote it the loudest will ultimately grow the fastest.
MySpace.com is a perfect example. It wasn't the first social networking site. Others like Friendster and Tribe were the pioneers. However, MySpace quickly lapped them all by providing the features that inspired a more detailed form of self-expression. Then, bands started flocking to the site as a way to showcase their music. Status. Exposure. MySpace won't cut you a check, but it provides the means to make a little coin by promoting other money-making pursuits. At the very least, you have a platform for begging for virtual tips.
The problem with riding MySpace's coattails is that the fast-growing site was recently gobbled up by Rupert Murdoch's News Corp. (NYSE: NWS ) media empire. There are some pretty good reasons to buy into the entertainment behemoth, but it's too crowded a conglomerate to buy into for the sliver of the pie that is MySpace.
I usually get a chuckle when I hear conventional news sources talk about blogging. They tend to play it off as a limited universe of well-read politicos, when in reality, the realm is mostly made up of rambling youth reaching out to a handful of virtual friends. MySpace, for instance, offers a blogging feature for wired youths. However, the one company that helped thrust the medium into the mainstream was an edgy little company called Blogger.
Blogger provided the tools for that sophomore in Nebraska to ramble on about her quest for the perfect pair of shoes or the stamp collector in Phoenix to gush about his prized acquisitions. Before blogging, thrifty pontificators had free, ad-supported webpage hosts like Lycos' Tripod or Yahoo! (Nasdaq: YHOO ) Geocities, but blogging eliminated most of the layout design and HTML programming learning curves by offering a series of templates.
Blogger was already gaining traction before Google (Nasdaq: GOOG ) bought it out. Usually getting scooped up by a larger player coats a promising upstart with a bland layer of homogenization, but not this time. Google helped Blogger cast its net out faster and farther. In 2003, Google introduced the AdSense program that allowed website publishers of all sizes to duplicate Google's contextual marketing ads in exchange for the lion's share of the revenues. A year later, it incorporated it into Blogger's interface so writers could seamlessly integrate a profit-sharing system into their blogs.
The AdSense program was huge for Google in other ways. In and of itself, AdSense doesn't appear to be a major contributor to Google's bottom line. Yes, it accounted for 42% of Google revenues this last quarter, but if you back out the $629 million that Google paid back to its publishers, AdSense accounted for just 13% of the adjusted top line.
But it's that generous payout that had webmasters flocking to broadcast Google ads on their sites. Google found a way to wallpaper the Internet with its brand on even the most specialized of sites. It's how Google was able to overtake Yahoo! Overture, a pioneer that has been too slow in rolling out its rival Yahoo! Publisher Network offering.
In the same way that eBay (Nasdaq: EBAY ) galvanized home-based retailers and made spring cleaning a profitable experience, Google has empowered the community of hobbyist and dedicated webmasters.
There's always a money trail
Before the MP3.com domain was acquired by CNET Networks (Nasdaq: CNET ) , it had hosted a vibrant music site. Yes, having the generic domain helped, but what really drove traffic to the site was the launch of a Payback for Playback program that paid artists based on the volume of streams and downloads that their music generated. It wasn't long before musicians who had housed their music on several sites for the sake of getting noticed threw their promotional weight behind MP3.com. Money was a factor. MP3.com then upped the ante by allowing artists to create and sell CDs off their uploaded MP3s.
Everyone has an inner entrepreneur. The reason why free self-publishing sites like Cafepress, Lulu, and Zazzle are thriving is that folks get surprisingly motivated to finish that novel or design that T-shirt when they see that the path to profitability is as simple as the uploading process.
Another space to watch is video. Thanks to the proliferation of broadband and cheaper storage prices, streaming video has become a major initiative for the major portals. Google and Yahoo! are all over it, but a tiny little upstart called YouTube.com is rising up the ranks, and Alexa.com now rates it as one of the 100 most visited sites on the Internet.
Unlike the cookie-cutter video offerings at the major portals, YouTube offers community-backed features. More importantly, it allows third-party sites to stream the videos off YouTube's servers and even gives them props by featuring the URLs of the most active referrers to each clip. It's a great model. Yet there's a new company called Revver.com that may even trump YouTube. It offers many of the same features as YouTube, but it's also offering to split ad revenue with users uploading original videos. It's a bold approach. Within a year, Revver will either be huge or it will be history. There is no in-between when you're dishing out that kind of tasty viral candy.
Investing in the invisible
It shouldn't surprise you that the better mousetraps aren't coming from well-to-do juggernauts with billions in the bank. The hungry upstarts are probably that creative because they are both hungry and upstarts. The fact that most of these companies are too small to go public is frustrating. It's just as disheartening to see so many of them acquired by larger companies so early in the revolutionary process. Yes, I value eBay more than I would if it were still a standalone auctioneer because it also chugged down PayPal, Half.com, and Skype. I just wish I would have had a chance to bank on the individual entities a little longer to make some serious money.
How much do you want to bet that YouTube doesn't make it to next year as an independent entity? If it does, I'll put on a sundress and upload the video to YouTube. Or, better yet, I'll upload it to Revver and profit from the humility.
The big boys do get it once in a while. Amazon.com (Nasdaq: AMZN ) became the leading online retailer thanks to its ambitious Amazon Associates affiliate program in which websites everywhere were pitching Amazon products in exchange for as much as 15% of the revenue. Never underestimate the delicious allure of green carrots.
An investor can do far worse than tracking the buyouts. If the acquirer is small enough, there may be a good deal of octane there, as in how CNET's traffic exploded with the acquisition of photo-sharing hotshot Webshots.
CNET is one of the three dozen stock recommendations that have been made to Motley Fool Rule Breakers newsletter subscribers. This research service highlights fast-growing companies, many of them on the cusp of stardom thanks to their industry-altering ways. Just as CNET's Download.com has empowered independent software developers, Rule Breakers empowers individual investors with growth stocks that have yet to mature into pings on more conventional radars. It's a strategy that may not be for everyone, but if you consider yourself a superior growth investor, you can go with a free trial subscription to see if it's right for you.
In the meantime, will someone please buy YouTube? You don't want to see me in a sundress.
Amazon and eBay areStock Advisorrecommendations.
Longtime Fool contributor Rick Munarriz uses many of the revenue-generating sites mentioned in this story, but is not a shareholder in any of the companies. The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.