Maturing Web

Typically, an industry goes through certain phases. First phase is the discovering phase where people find out about the new product or service and initiate the growth of the industry. Some of these industry started out in early stages, like Benz or Ford for the automobile industry or TWA for the airline industry. Some of more recent examples were Starbucks, which introduced $4 coffee and SunPower, a spinoff from Cypress Semiconductor, with mass produced solar panels. These trends started with one dominant player in the market until the market has been proven to be lucrative and profitable.

Then comes the explosion stage. This is when other companies realize that the industry has huge potential, so many will utilize market or product extension strategy, as Cypress Semiconductor did going from Semiconductor to solar panel, to get in to this market. This often is referred to as the golden age of the industry. Some of the examples of this is the automobile industry during the 1940s through 1960s. There were several hundred automobile makers in the world and the fierce competition drove growth and innovation. Same thing can be said about the computer industry in the 70s and 80s. After Altair produced first "home" computer, Apple and IBM/Microsoft legitimized the industry. This spawned many competitors in the market including Commodore, TI and Radio Shack. This was followed by several larger competitors who took the market by storm, like Compaq, HP and Dell. Everyone was profitable with large margins as demand outpaced supply. Also, the price of the products/services begins to drop and the margin will slowly diminish.

Then comes the maturity of the industry. This marks the slowing down of the hyper-growth of the overall industry and beginning of consolidation phase. This also means less competition which leads to less innovation and commoditizing of products or services. Often the price is the key differentiating factor between products and services at this point, which leads to start of declining or stabilization of the industry.

If the industry still experience a year to year growth due to demands, then it will continue to exist for any foreseeable future in a somewhat stable environment. A good example of this is the storage industry. Overall demand of storage will never diminish because more data is produced everyday. This new data needs to be stored and archived so that it can be accessed later, so there will always be increase in need for storage. This continues the industry steady growth until there is no need for storage or competing technology makes them obsolete.

A good example of an industry coming to near extinction is the vacuum tube industry. When more reliable and cheaper semiconductor solutions were available, the vacuum tubes companies slowly diminished until they were either producing products for the replacement industry or small niche markets.

A good study of an industry life cycle is the storage industry mentioned earlier. Initially, the disk drives were the domains of the mainframes and in educational research area. IBM and DEC were about the only companies producing the disk drives as we know today for a limited market. As the personal computer industry took off, the opportunity produce storage for the PCs fueled big growth of industry. During the 80s and 90s, there were many companies making disk drive, Seagate, Western Digital, Conner, Maxtor, Miniscribe, Micropolis, CDC, Quantum to name a few. As an example fo the growth, Conner Peripheral was the mentioned as the fastest growing company to Fortune 500 during that time. As the technology matured, and their margins shrank from 40% to single digits, the consolidations took place. Today, there are only 4 large companies making disk drives, Hitachi, Fujitsu, Seagate and Western Digital. In order to make up the slimming of margins, many of these companies are now in consumer storage systems business, where the margins are still many times better than disk drives. They adapted to the maturity of the market via market extension but they are in constant threat of extinction from the Flash memory. Seagate announced that they will get in to the Solid State Drive (SSD) market recently to hedge a bet with the new technology.

OK, so what has this to do with the Web? Well, I think the web is entering the maturity stage based on my observations. First, the consolidation is starting accelerate. I just read that Google is pulling out of their AOL’s investment. Microsoft had made an offer for Yahoo. The quicker consolidation is specially prominent in the Web 2.0 or social networking area. In the past, large companies like Google always purchased companies based on the needs. Many of the companies were purchased for the technology, which has been incorporated in to many of Google’s applications and services.

However, in the mature market, the acquisition is going to focus more on turf defense than technology. We have seen this already on above mentioned Yahoo. Does Microsoft really need Yahoo search? Maybe. However, the highest motivation for Microsoft seems to be positioning themselves to competing better with Google on search. If they purchase Yahoo and infused it with cash and technology, they may be able to distract Google on their turf. Then MS can mount attack on Google’s vulnerabilities left by the distraction. So, MS’s mentality seems to be if I don’t buy this company, my position in the market may weaken against a strong competitor. Or, maybe it is I don’t want distraction of spending  money to compete against a small competitor so just buy them to get rid of them. Recently, Oracle wanted to buy one of their small competitors so they can shut it down and migrate their customers to Oracle platform. This will start to happen in the web area.

If you look at the industry, it’s ripe for more consolidation. Flickr is already owned by Yahoo, YouTube by Google, Facebook partly by Microsoft, Myspace was bought by Fox, etc.  So, what will happen to Digg, Twitter, Linkedin and other more well known companies in the industry? When will they be purchased by a large company? I would say soon as they become available at an attractive prices. Or maybe they will start to acquire companies, if they have the cash, and become an Internet power house themselves. Whatever will happen, I would predict that in next year or two, the consolidation will increase and the web will become a stable and mature industry. Then the questions is, will there be anything in the future that will make the web obsolete? I don’t see anything in the immediate future but you never know.