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Last updated: August 9, 2005 3:55 pm
What will be the Next Big Thing on the internet - and how will the new markets and businesses being created online affect traditional industries?
To mark the 10th anniversary of Netscape’s IPO on August 9, Bill Gurley of Benchmark Capital, a Silicon Valley venture capital firm whose internet successes have included eBay, and Richard Waters, who writes about technology for the FT from San Francisco, answer your questions.
Click here for Richard Waters on Netscape
It seems that Asia, China in particular, is undergoing amazing growth through innovation. Arguably there is more innovation coming from that region of the world than anywhere else right now. How does Silicon Valley stack up in terms of innovation currently? Where will the “next big thing” come from?
Bill Gurley: Keith, that is an insanely insightful question. There are many reasons why Silicon Valley is an epicentre, and there have been death-knell calls before, as far back as several decades. What you see today is real however. Asia and Europe matter in innovation and will forever. Can the US keep up? I don’t know. I worry deeply about the lack of concern over our broadband policy. We are falling each year in terms of broadband per capita, and yet some want to pass laws that say cities can’t choose to rectify this situation. We will fail to innovate if we fail to recognise the importance of the technology infrastructure. The other equally important issue is education. China graduates 600,000 engineers a year, we graduate 70,000. And we just adjusted the SAT from 50/50 math to English to 33/67. Is that the right direction? I doubt it.
Richard Waters: Don’t count Silicon Valley out - it is still drawing the smartest from around the world, even if they are coming in fewer numbers and there is now more of a reverse flow as well. Most of the world’s venture capital money still flows through this small area - and most of the VCs who are here like to invest in things close to home. That said, the big markets will eventually be where the best new ideas emerge first, and that inevitably means that means the centre of gravity will shift. I think there will be more regional, or localised, “big things” - these are huge markets, and local preferences will take hold.
How do you see web based training/e-learning developing to keep pace with people’s personal interaction expectations and desires?
Bill Gurley: This is a great question, as the investment world has shied away from this market. Ironically, I believe that the University of Phoenix Online has a massive market capitalisation. Plus you have Blackboard BBBB out there that is not doing bad either. What I keep hearing is that online education is on fire in Asia. Now there are two things that are different about Asia. In many Asian countries, access to very high speed broadband is more prolific - as you may have read the US is falling way behind on this front. Also, as you continue to read the insatiable thirst for learning in countries like China is well above the Western world. In these areas, and for these reasons, you should expect online learning to thrive - it will be huge. But it will be correlated with broadband speed.
How do you view the future of online radio and podcasting? The phenomenon may well continue to grow in popularity, but what about the attendant business model? Can these new content streams supply sufficient revenue to keep writers, journalists, and presenters in the style to which they’d like to become accustomed? Or is it destined to remain a non-paying hobby for the few?
Aidan McKeown, Dublin, Ireland
Bill Gurley: I suspect someone will make money out of podcasting, but you have to look at supply and demand. If there are a number of people that want to do it for ego reasons, than supply is inflated and pricing comes down. I would suspect - because of the targeted nature - that “subscription” is more likely to be the model that emerges. For example, if Tiger Woods offered a diary of his Master’s experiences, I suspect a few people would pay. But its not mass market by definition.
Richard Waters: The thing that has kept writers, journalists and presenters in the style to which they have become accustomed has been artificial scarcity, thanks to high production and distribution costs. I’m convinced there will be ways of making money from podcasting - and it will be from advertising rather than subscriptions. The amounts of money involved will be pretty small - but then, this is a pretty cheap medium to work in. The big challenge for all media in the future: the internet unblocks distribution channels and opens up a huge new audience, but the amount you can earn off each customer will be much smaller. Can you make up in volume?
I was at Stanford in the Information Systems Lab in 1993-1994 when Filo and Yang started Yahoo down the hall. Now I am at MIT working on a PhD in “systems of systems” and complexity theory as observed in very large systems such as the internet, the stock market, global weather, traffic patterns. Should we be prepared for disruptive change due to advances in robotics, speech recognition, and fuel cell technology?
Dietrich Falkenthal, MIT Engineering Systems Division
Bill Gurley: That’s one of my favourite subjects - complexity theory. I read Waldrop’s book many years ago and keep several copies on hand for friends. On fuel cells, I have seen many startups but the economics are not “blow away”; in a way you would want to label it ”disruptive.” I am working with a company (www.nanosolar.com ) that aims to make a solar cell out of a chemical stack instead of silicon and this should allow a “disruptive” price point. On robots, I haven’t seen anything disruptive. The “success” stories seem to be those where they simplify the problem, like the guys in Boston making robot vacuums.
What phase of the internet cycle are we in? Are we waiting for a new wave to come or are we still basically riding a wave that started in 1995? In other words, are we likely to expect incremental changes in technology as opposed to breakthrough technologies?
Bill Gurley: I think the internet question is a really good one and really hard to answer. Google and now Skype give me confidence there is still plenty of room for innovation. Plus the connected medium allows for viral adoption at every turn. I would not walk away from this market just yet.
Richard Waters: I’m firmly in the “brave new world” camp. True, broadband has been coming for years and we’ve been hearing about wireless internet access for so long it’s getting tedious (I remember chairing an FT wireless conference in London five years ago and hearing several speakers claim that we would soon all be carrying handsets with location-sensing technology that would pick up details of special offers in stores as we walked past: someone pitched the same idea to me last week. It sounds as daft now as it did then.)
But a couple of things make this much more of a breakthrough moment. One is that penetration of broadband (define it how you like – I think it’s less about speed than being “always on”, so slow-motion US broadband counts in my book) – is reaching the point where it becomes the norm. Once a mass of people is connected to the web in “always on” mode, new forms of behaviour – in how you communicate, find information, whatever – take over. (Wireless will extend the “always on” experience, though I still think it’ll be mainly limited to communication like e-mail for some time.)
The other thing is that, when you mix pervasive technologies like broadband with other, newer, more disruptive technologies, interesting things happen. WiFi is clearly the leading contender here. With broadband and WiFi in the home, behaviour starts to change and the impact of the technology is magnified. One and one add up to more than two. The equation becomes: Broadband + WiFi = Voice over IP all over the house, and the end of phone bills as we know them. This is powerful and disruptive stuff, and its impact has not been felt yet.
How do you see the everyday life - the leisure time of the individual evolving? It has become more and more internal in one respect - stay at home in front of the computer - and more global on the other hand - reaching out, speaking to and buying from the world. How will this evolve and how will it affect spending patterns? Will we no longer go to the shopping mall? Will we travel and to where? What will be our entertainment?
Michelle O’Neill, Group President, Emerging General Markets, Harris Interactive
Bill Gurley: You should know that as a venture capitalist, my focus is really on three years out, instead of five to ten. The most amazing shift in free time usage is clearly the move to MMOGS [Massive Multiplayer Online Games].
People are spending hours and hours in the multi-player environments. The biggest bang has been in Asia, but World of Warcraft’s success here in the US this past 9 months is nothing short of remarkable. For those that don’t know WOW launched last December - $50 for the CDs and $14/month to subscribe. 3.5m users now. The top success before was Everquest - 400K.
Now we are seeing much more casual and social MMORPGs - Nexxon’s KartRider in Korea is the stuff of legend, and has already been highlighted in the financial press. We have invested in a company called www.habbohotel.com that has remarkable traction providing an avatar environment for teens.
Here in the US we invested in www.secondlife.com - a virtual world where the users build out the experiences. It is on a tremendous ramp. Not sure this is what you wanted to hear, but people are spending 8-20 hours a week in these “Worlds”. For some, there is a heavy social aspect to this interaction. I won’t comment on the moral impact of this movement.
Do you think advertising on the web will go the same direction as it has done on television and film, creeping into photoblogs for product placement?
Bill Gurley: I think you have to look at what saved internet advertising, the cost-per-click ad (CPC). CPC is a performance based ad product that everyone on Madison Avenue said “would never work!”. The types of advertising that works on the web is contextual, not demographic. The big money is in getting in front of someone while they are researching that very topic - like cars, or homes, or healthcare. I would expect these context ads to dominate. You will see product placement. In fact, KartRider already has sponsors for virtual cars. Go check it out.
Richard Waters: It will go further than that - the advertisers will produce the shows again, we’ll be back in the realms of the early soap operas. Pepsi Smash is a good example of that, a show based on a collection of music videos that didn’t make it on TV that is now running online on Yahoo!
Given the improved efficiency and security advantages of tagging, do you see a large increase of capital into companies providing tagging technology?
Andrew Guard, Product Manager, eForce
Bill Gurley: I think (and could be wrong) that tagging is another one of these “tricks” I have mentioned that simplifies the problem. It’s not a universal solution, and it works much better with some data types than others. Allow sorts and searches on tags and they will be increasingly used, but I wouldn’t put VC money behind a company focused on tagging.
Which industries do you think will face the biggest upheaval from internet-based communications in the next 10 years?
Kate Mackenzie, Journalist, FT.com/Financial Times
Bill Gurley: Obviously the telecom sector is undergoing major disruption. You have the obvious erosion of price/minute voice. But there is way more than that. As has been highlighted in the Financial Times, cities have figured out you can use 802.11 across the entire city. The performance of these networks is better than EVDO “by an order of magnitude”! And they are cheaper to deploy. WE now see entire cities that aim to make wireless connect by “Free” as a public service. One of our investments, www.tropos.com , is at the centre of this storm as a leading provider of equipment.
Now that’s disruptive and the incumbents don’t like it one bit. So they have asked Congress to pass a law to make these networks illegal. But water runs downhill - the market will chose the cheapest solution. The world of video will see disruption as well.
Richard Waters: The one that could see the biggest shift in the shortest time is telecommunications. Like a lot of people, I’m discovering the joys of Skype and the free video conferencing experience you get with some of the instant messaging services now - in fact, last time I was in London I hooked up a webcam for my mother and we talk face to face across continents now for free. This is the most fun I’ve had for zero cost since I got my WiFi box a few years ago (well, once you’ve paid for the box, that is.) How can this not devastate the phone companies?
Is it now accepted that the quality of the leading innovators developing the next wave of ‘relevant innovation’ are as strong in UK/Europe/Asia as they are in the US? With firms like Multimap, now also 10 years old, providing the largest car company in the US with technology to lead consumers directly to car dealerships (in addition to a plethora of other location based services), have we now accepted the possibility that the next paradigm might well tap us on the shoulder from outside America?
Bill Gurley: Let’s put it this way - the two most talked about emerging companies in the press this past week are Skype and Baidu, neither of which are based in the US. It’s a global game for sure, and Friedman has it right - the world is flat.
Richard Waters: The next paradigm shifts are already happening outside the US. Bill has mentioned online games - broadand is changing the gaming industry much faster outside the US, turning it into a far bigger branch of the entertainment industry. Wireless is clearly way behind in the US - as the father of a teenage daughter in San Francisco, it seems amazing to me that she is just discovering ringtones and SMS (and also scary.) The successful online business models from the US have travelled well so far - but users set the pace on the internet, and they are leading new habits far faster outside the US.
Now that we hear that Google may not speak with Cnet news for a year, what does this mean for all of us? Can businesses operate with one privacy strategy/ policy for their customers and another for their own CXOs? Who owns data about me? Should I start lying about myself to everyone but my financial service providers?
Richard Waters: The case you refer to (Google objected to an online news site that used its search engine to dig up personal information about CEO Eric Schmidt) really does make the point that, however liberating internet search engines have become, we aren’t yet prepared socially for the consequences. When whole business models are built around companies collecting and using personal information about you, privacy will become incredibly hard to maintain: Paul Saffo, at the Institute for the Future, says that those of us who can afford it will end up buying anonymity. Everyone else will just have to suffer in public (or, yes, lie.)
When do you believe will people be weaned away from the typewriter keyboard (designed 1874)? What will be the cultural ramifications if we all speak to our screens?
Bill Gurley: I would be surprised if the keyboard goes away any time soon. Every child these days is learning to type at earlier and earlier ages. Voice recognition is a error-prone activity, and while there have been many advances, it’s a classic hard problem. I wouldn’t be surprised to see some new keyboard advance that does for typing what graffiti did for the pen input.
What will the next phase of internet development mean for small businesses?
David Grayson - London
Bill Gurley: I think the small business of the future will be dramatically aided by technology. First of all, I think any small business will simply have laptops and a printer all connected via WiFi. Everything else will live in the cloud - e-mail, storage, PBX, applications. Salesforce.com is a great example. New VOIP solutions will allow all members of the small business to be distributed, yet it looks to the outside world like they are not. Plus, with good graphics and creativity, you can look as large as you want to be on the internet.
Richard Waters: eBay and Google have already shown the way. eBay is already one of the greatest single forces for small business creation there has ever been - that $30bn of gross merchandise sales that flows through its markets each year supports hundreds of thousands of businesses. And for small publishers on the web, there’s no need to run your own salesforces - just plug into Google’s ad network. The scope for other services, delivered over the network, to support small businesses is vast, from accounting to administrative support to sales and marketing services.
In a Red Herring magazine article in the 1990s, Bill Gurley shared with the readers a thought which originally comes from a 1993 article written by Howard Marks for the Financial Analyst Journal, namely that “only accurate non-consensus information is valuable for investment purposes”. Does he still look for investment ideas which are accurate, non-consensus and with a good timing, and if so, what does he see as the next biggest investment opportunity which meets these criteria?
Bill Gurley: I think about this every day. Last year we made a big bet that MMOGS [Massive Multiplayer Online Games] would come to us and Europe. I think that will turn out to have been non-consensus and accurate. We also bet that WiFi would evolve from a indoor tech to a outdoor metroscale one. For years no one would believe us that this could work. Now Tropos Networks has over 200 customers.
Is there any way the internet can be replaced by a non-Ethernet protocol? Some opinions are that virus vandalism can never be thwarted as long as Ethernet is used.
Bill Gurley: I think we will be using Ethernet for an extended period of time. On the web you can find numerous articles on “technological lock-in” and “increasing returns”. Ethernet is a classic example of this. The number of devices that “speak” Ethernet is immense, and there is no good way to insert a new technology. I do disagree with the assertion that it can’t be fixed simply because Ethernet has tackled every problem that has come its way. Open standard technologies evolve quickly. They have a high “fitness” score.
When to you think Google will deliver only directly relevant material? When will truly intelligent/learning indexing hit the street?
Bill Gurley: I have no reason to believe that we will see anything other than slow steady progress on machine learning. Part of the problem is that the answer may be inherently unknown. You can’t infer context that is uncommunicated. But like with the keyboard, I think you will see “tricks” or “hacks” that short-cut the problem.
Richard Waters: It will be a very long time. We’ve all been so enthralled by the big advance in search technology that came with Google (and Yahoo! and now MSN catching up) that it’s created a belief that search will continue to evolve at the same break-neck pace. In fact, many of the innovations in search engines we are seeing at the moment are in user interfaces and the addition of extra content, not in the underlying “relevancy” of the results. The “personalisation” technology that would make results better is a hard problem to solve, and it will leave users frustrated.
I’d like to know if the internet is still booming, or if it’s reached its peak? Are there any stats anywhere on this?
Bill Gurley: I am not a statistician so I can’t help you here in any definitive way. It would be very hard to suggest that it has somehow peaked. Certain sectors like online dating, where the companies and offerings are quite saturated, could be viewed that way. But the new things like Skype and KartRider continue to amaze and shock me. Plus, as we all know, there are at least a billion people in China not online yet.
Richard Waters: Still booming. A couple of stats from Morgan Stanley: There will be around 1bn internet users by the end of September, which is 130m more than there were a year before. As the numbers get larger, the rate of growth slows, but in absolute terms the number of users has grown by about the same amount each year for the past few years. Broadband is starting to pick up fast: from 57m users around the world at the end of 2003 to 209m at the end of this year. That broadband number is particularly important - broadband users are generally wealthier, spend more time online, click on more ads and buy more stuff, which is why e-commerce and online advertising markets are also growing fast.
How will PR be affected by the new markets and businesses being created online?
Bill Gurley: PR remains an essential part of “growing” successful online businesses. Look at what Skype accomplished - zero marketing budget, but more “impressions” embedded in articles than anyone could ever purchase. I am not sure this means go hire a bunch of PR agencies, but you need to know how to spin a big story. Some people have this innate talent.
Richard Waters: Low-cost publishing tools (think blogging and podcasting) and free distribution over the internet will mean that Big Media can no longer rely on its captive audiences. That means more fragmentation, which is a real challenge for the PR industry - how do you get your message to the biggest possible audience? It also means new opinion-formers will emerge (and fade) quickly, which means being far more alert to how views are being shaped real-time in this new medium. On the other hand, it gives companies or politicians a way to by-pass the media altogether to talk straight to their audience - something that will demand a whole new slew of media skills from their PR advisers.
From Netscape to the Next Big Thing
Somewhere in the world in the next few weeks the billionth human being will sit down in front of at a computer, log on to the internet for the first time and join the swelling throng in cyberspace.
That is quite a record for a medium that broke away from its academic roots only a decade ago. But it may be only a taste of the upheaval in store over the next 10 years.
Next week sees the anniversary of the Netscape initial public offering – an event that triggered Wall Street’s dotcom mania. The arrival of Netscape’s browser made the internet a more conducive place for the non-technical user and also spurred the creation of companies such as eBay, Yahoo ! and Amazon.com, which have all had 10th birthday parties of their own – although most dotcom companies never made it this far.
It is worth considering how ingrained the extent to which those survivors have become in part of the everyday lives of their users. The $34bn of goods that changed hands on eBay last year is roughly equivalent to the gross domestic product of Kenya; Yahoo’s 379m unique users are equal to the populations of the US and UK combined; and the average person on the planet looks at 10 views 10 webpages on Google each month.
Even early enthusiasts for the new medium did not quite foresee how far it would work its way into popular culture. “It was a stretch to say that niche focus newsgroups and bulletin boards about Unix would some day be newsgroups about the latest Harry Potter book or Batman movie,” says Mary Meeker, the Morgan Stanley internet analyst who was among the first on Wall Street to tout the internet’s potential.
Much of the early euphoria was of course misplaced, even if it has been proved right over the longer term. It is three years in October since the nadir of the stock market slump, which wiped more than $6,500bn from the peak value of Nasdaq stock market where many US technology companies are traded (see chart).
Most of that wealth destruction reflected over-investment in telecommunications networks and the technology companies that were building the infrastructure on which the internet depends. Overcapacity in telecoms and tech, though, has only served to brought down prices and made the internet more widely available, helping to fuel a new round of online innovation.
“The pace of change is accelerating. What got started is only now happening,” says Ms Meeker.
It is hard to argue with the sheer weight of numbers. According to estimates by Morgan Stanley, 1bn people will be online by the end of next month, three times as many as at the peak of the technology and telecoms bubble at the beginning of the decade. Roughly one in five of those people already uses a broadband connection. And mobile access to the internet has barely begun: sometime during the next decade, more mobile handsets than personal computers will be plugged into the global information network.
Of course, eyeballs alone do not create a business – a point amply demonstrated by the experiences of many dotcom pioneers. But this time around business is following close behind.
Global online advertising hit $15bn last year, two-thirds of it in the US, and it is growing at some 30 per cent a year as advertisers rush to keep up with the shift in their audience online. Consumer e-commerce, which reached $295bn last year, is set to grow by 38 per cent this year, according to IDC.
At the same time, the companies that dominate the new medium have learnt from the mistakes of the past and are refining business plans that already make them some of the most valuable on the planet. “We are doing a better job of getting more value from each click,” says Eric Schmidt, chief executive officer of Google. “If you show better ads – which sometimes means fewer ads – business improves. That’s something we’ve learnt over the last year.”
None of this even touches on the less visible, and potentially even more profound, impact that the web has had on how businesses are organised, how social and political life has been affected or how a country such as India has been able to join the world economy in a way that would once have seemed impossible.
If that is the story of the internet so far, then what do the next 10 years hold in store? In two words: more upheaval, as the forces that caused consternation in many corporate boardrooms in the late-1990s are once again unleashed, this time backed by more robust business models and a stronger better technology. ical base.
“A lot of business people were very happy about the internet market correction – that pulled a lot of resources off the internet,” says Ms Meeker. “But the internet business just kept on going. The disruption to a lot of traditional businesses has only just begun.”
It might be added that Many internet businesses are probably in for an unsettling time of their own. As Meg Whitman, chief executive officer of eBay, warns, half of the internet giants 10 years from now may well be companies that you have never heard of (see below.) Internet stock valuations, including Google’s price/earnings ratio of 87, once again seem to be ignoring the fact that barriers to entry in this global medium remain low and that the next disruptive idea may be just around the corner.
As with the last decade, the impact of the web in the next 10 years is likely to be felt most acutely in those fields that depend most on disseminating information: in communications, commerce and the media.
While e-mail and instant messaging were the low-cost communications of the internet’s first decade, the next communications revolution may well take aim at the voice calls that still account for the bulk of the telecom industry’s revenues. In its first year, more than 140m people have downloaded free software from Skype, which lets computer users talk over the internet, making it the fastest-growing consumer technology in history.
“We will have free global communications in very short order,” says Paul Saffo, director of Institute for the Future, a California research group. Along with new low-cost disruptive communications technologies such as WiFi and WiMax, that signals a fresh threat to an industry that was hit hard during the first phase of the internet.
As the barriers online between communications, commerce and media are eroded, meanwhile, the internet is likely to bring forth new technologies and challenge existing forms of human interaction.
Two forces, in particular, characterise this latest wave: the rise of search engines, and the many new online tools that have emerged been created to support the outpouring of what has always been is known on the internet as “user-generated content”.
Search engines have already established themselves as a pivotal form of distribution online. As more of the media become digitised, that role is only likely to become more significant. “The internet will become a very serious competitor to cable and satellite in the home, and the impact on print media is likely to be dramatic,” says Roger McNamee, a Silicon Valley financier who now specialises in the media industry. “At the end of the day, search-based technology is really how consumers will access and find that content – that’s a huge deal.”
An increasing part of this content is likely to come from internet users themselves. “We are in the middle of a very big shift from mass media to personal media: you get to answer back and create if you want,” says Mr Saffo.
Blogging, now a pastime that now occupies of more than 15m people, has been an unlikely early manifestation. Other forms of self-expression and community-building are gathering force, including photo-sharing sites that let families or groups of friends see each others’ pictures; podcasting (a form of audio blogging); and social networks that connect wider groups of friends. to name just three.
“Blogging is a transitional form on its way to something else. It’s interesting, but it isn’t stable,” says Mr Saffo. The urge towards communication and self-expression, and the low-cost technology to make it possible, will give rise to new fads.
Seen from the perspective of 2015, search and blogging may look like quaint and antiquated ideas, overtaken by another Next Big Thing on the internet: some new metaphor for how way of fulfilling people’s desire want to interact and find information, entertainment or goods to buy online.
Whatever its form, though, what comes next is likely to draw on the forces that have already been manifested during the medium’s first decade: a pervasive interconnectivity, aided by increasingly sophisticated software tools that uncover and make useable the ever-expanding sources of information on the open global database.
There is another lesson from the first decade that is also likely to hold good for the years ahead: for clues about how the internet will eventually change your life look no further than the teenager sitting next to you. “The 15- to 20-year-olds,” says Ms Meeker, “will show and tell you where it is going.”
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