Innovation Series: Internet 3.0

Who invented the Internet?

That's not a trick question -- not even a material one, really. The stumper for investors, in fact, is figuring out who will improve on the Internet.

Today's leaders are fairly well-entrenched. No one seems worthy of challenging Google (Nasdaq: GOOG  ) in monetizing the Web. The search-engine stud is collecting nearly three times as much as its nearest competitor, and that lead is widening.

Good luck, likewise, in taking on Amazon.com (Nasdaq: AMZN  ) when it comes to Internet retail. As big as Amazon is, sales growth has actually been accelerating through most of the past two years, with its already thick slice of e-commerce getting even thicker.

Even though certain categories such as social networking, online auctions, and collaborative encyclopedias find their respective market leaders vulnerable lately, they still have the same companies on top that ruled the roost a couple of years ago.

This doesn't mean change isn't coming. It's just running late.

Web 3.0, don't be late
The dot-com bubble peaked eight years ago. Companies that survived the sudsy splatters after it burst are more talented than fortunate. Now that venture capitalists aren't writing blank checks to unproven startups, you're not going to matter unless you're profitable or popular, or unless you bring something new to the table.

That will be even harder to do now that the Internet has truly leveled the playing field. Web 2.0 put the power in hands of the people. That's a noble concept in theory, but it's also putting the old "content is king" adage to the test by squeezing out editorially driven sites in favor of consumer journalism and narrowcasting niche sites.

Take CNET (Nasdaq: CNET  ) , for example. The company remains a seasoned champ in delivering technology news, but its growth has been challenged by smaller outfits such as TechCrunch, which have used economical blogging platforms to break news more quickly and cheaply.

Even areas that seemed like dot-com layups, including Hollywood films, adult entertainment, and major music labels, have struggled in cyberspace. Piracy's not to blame, though that remains a potent nibbler. Instead, the growing popularity of free, homegrown content is eating away at audiences. Video-sharing sites, such as Google's YouTube and the garage-band hub that News Corp.'s (NYSE: NWS  ) MySpace has become, are attracting audiences on shoestring budgets.

That Time magazine with the tinfoil mirror cover that declared you -- yes, You -- its Person of the Year may have been a bit premature, but the "time" has come for giving the power to the people. Whether it's personal blogs taking on companies, or something as citizen-empowering as the YouTube presidential debates, all the virtual world's a stage, even if it thins out the available audiences.

The Internet of the future  
Connectivity is a global pursuit with localized intentions. Some of the more intriguing online startups -- such as Marchex (Nasdaq: MCHX  ) , with its portfolio of ZIP Code and region-specific domain names, and area-sponsorship specialist Local.com (Nasdaq: LOCM  ) -- are cashing in on the appetite of local merchants to get noticed by local Web users.

Even Web giants Google and Yahoo! (Nasdaq: YHOO  ) have become attractive ad outlets for small-time merchants who simply peck out a small text ad instead of generate memorable display advertising.

This doesn't mean the push for narrow audiences will be lucrative. Google's latest quarterly report got stung by the poor performance of ads served through social-networking partners such as MySpace.

Don't give up on those small-time dreams just yet. If paid search is the one proven moneymaker -- judging by Google's online superiority, despite serving fewer pages than Yahoo! -- then local search will also be huge.

Market researcher Kelsey Group expects local search revenue to more than triple over the next five years, to $6.6 billion. Obviously, Google won't be alone in feasting on that cash pile. Companies such as AOL and Yelp recognize the appeal of attracting a local audience through user-generated reviews. The innovators that help create localized communities -- privately held enablers such as WordPress on the blog front and Ning in social networking -- will emerge victorious as well.

Even the forgotten old-school media companies will be able to stand tall, provided that they had the foresight to flesh out popular city-specific websites as circulation at their local papers plummeted. Look around: The next companies to profit from a local search surge just might be in your browsing history.

The Internet's come a long way, only to get you back where you started. So who improved the Internet? If you've got that reflective tinfoil with you, you're staring at them.


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