How to Make Money in the Internet Age

“It’s technology, not business or government, that’s the real driving force behind large-scale societal shifts.”

– Sean Parker, Social Networking’s Miracle Man

It will come as no surprise to readers of these pages that the freest marketplace on earth is also the most rapidly advancing. Although there have been many attempts to regulate the Internet, with varying degrees of “success,” the fact remains that cyberspace, with its amorphous jurisdictions, whizz kid engineers and lightening fast evolutionary pace, is notoriously difficult to police. That leaves, for the most part, meddlers and do-gooders flailing in the wake as trailblazing entrepreneurs rewrite the rules and social conditions of what some have taken to calling the “4th dimension.”

For freedom lovers, that laissez faire environment is something that ought to be both celebrated and, well, left alone. Philosophical and sociological points aside for the moment, the technological hyper-leaps playing out right now online have implications that are very real, and very far-reaching for the investment world.

Consider, for example, the impact new communication technologies have had on the print media industry. Americans today have access to some 5,500 magazines and a similarly paltry number of newspapers…but well over 1 billion web pages. Over the past quarter century, newspaper circulation has fallen by about 7 million, even as the population jumped from 250 million in 1990, to 310 million today. By stark contrast, the number of unique readers of online newspapers has grown by over 30 million…in the past five years alone.

As a result of this shift, traditional advertising in both newspapers and magazines has suffered a sustained decline, down about 18% and 15% respectively in the past year alone. Digital advertising, meanwhile, is experiencing almost unabated growth. Online advertising has increased by about 9% over the same time, while advertising to mobile devices such as cell and smart phones is up about twice that much.

But even these impressive statistics pale in comparison to those posted by the Web’s Social Networking giants. The undisputed leader in this field, at least for the moment, is Facebook. Having passed the 500 million-member mark this summer, the online behemoth boasts a voluntary population about the size of Brazil and Indonesia combined. That makes it the third most populous “country” on the planet. And it doesn’t even operate in China…yet.

For skeptics, the thought of a company “posting” or “poking” its way to success is difficult to comprehend. But the Facebook site, through which users share more than 30 billion pieces of information every month, is also finding ways to monetize its enormous online presence. According to Google Finance, “Facebook runs more banner advertisements than any other Web site (176 billion a quarter) and drives more US visitor traffic to some sites than even Google. Revenues this year could reach $2 billion.”

Remember that Google Inc., weighing in with a market cap of almost $200 billion today, was not without its share of naysayers along the way.

Even Twitter, the center of the “microblogging” universe, is finding ways to muscle in on the highly competitive virtual stage. The site, with some 130 million registered users (roughly equal to the population of Japan), is currently growing its membership by over 300,000 per day. People “tweet” – or post limited-character blogs – more than one billion times per month and search Twitter over 800 million times a day.

That’s not to say that skepticism of the rapidly evolving industry is not warranted. For many investors, the wounds of the last tech crash are still too tender to even think about the lofty promises of the virtual realm. When the dot-com bubble burst in 2000-’01, Silicon Valley became a kind of high tech tar pit, littered with the remains of flashy start-ups that had reached absurd valuations. But in the mini-recession that followed, no government agency swooped in to save eBay Inc. or or any of the other outfits that saw their stock prices cut in half, or worse. Nobody in the halls of Congress were shouting that Microsoft was “too big to fail,” even though the stock slid almost 66% in that single year. Instead, the industry consolidated and myriad weak companies perished in the process. The bad apples were left to rot, in other words, and the good apples… Well, if you own anything “i-Related” (including shares of that particular company) you already know what happened to them.

The fact that the digital realm is so very hard to police and to regulate may be a continuous source of consternation for meddlers and do-gooders alike, but for frontier investors and unapologetic entrepreneurs, that freedom may just be the environment’s greatest draw card. More on this later in the week…

By Joel Bowman

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