The Internet: Eight Predictions for 2008

Last year, S&P offered seven predictions for Internet developments -- and its Magic 8 Ball was pretty accurate. Here is this year's crop.

by Scott Kessler From Standard & Poor's Equity Research

In some ways, the old saying "the more things change, the more they stay the same" defined the Internet segment in 2007. Video and mobile remain the new frontiers in digital advertising, Google (GOOG; recent price, $680; S&P investment rank, hold) continued to take market share -- and please its shareholders -- and Jerry Yang was back at the helm of Yahoo (YHOO; $24; hold).

In 2007, we bid goodbye to George Reyes as the CFO of Google, Stratton Sclavos as the chairman and CEO of VeriSign (VRSN; $37; hold), and Terry Semel as the CEO of Yahoo. A number of major options backdating scandals were also largely resolved. And, Google received FTC approval to acquire DoubleClick.

First, let's review our seven 2007 predictions:

1. Comcast will further establish itself in the Internet portal market with material partnership developments.

Comcast (CMCSA; $18; sell) signed a major online advertising deal with Yahoo, acquired Internet movie-ticket company Fandango, and launched entertainment/video website Fancast.

2. Google will strengthen its relationship with Apple.

Google is one of the premier providers of applications for Apple's (AAPL; $195; buy) iPhone. We wonder how this partnership will progress, given Google's efforts around open networks and platforms. Also, we indicated we expected a new collaboration related to YouTube, whose content is now available on the iPhone and Apple TV.

3. Google's efforts beyond Internet search and contextual advertising will continue to deliver only mixed results.

Although YouTube has continued to gain market share in the online video segment, it's unclear what the financial impact to Google has been. We've been impressed by offerings from, and growth at, the company's iGoogle personalized portal offering. However, Google largely remains a "one trick pony," in our view.

4. Facebook's efforts to expand beyond students and recent graduates will be largely unsuccessful. Moreover, the company won't sell itself to a large Internet company, especially if its asking price is $8 billion or more, as an early investor and board member indicated it was worth, according to an unconfirmed report by Bloomberg.

Although we were correct that Facebook would remain private, we were wrong in predicting it would have difficulties growing. Facebook was arguably the biggest Internet story of 2007. And Microsoft (MSFT; $35; strong buy) bought a stake in Facebook that valued the company at $15 billion.

5. Although the November elections bolstered the chances for a new net neutrality law, we don't expect one to be enacted in 2007.

No net neutrality law was enacted, and folks now seem much more interested in the upcoming 700 megahertz wireless spectrum auction.

6. Despite Google's leading market share, Yahoo's Panama launch, and Microsoft's substantial search-related investments, Ask.com, part of IAC/InterActiveCorp, is the search engine to watch in 2007.

Google remained the search engine company to watch in 2007. Yahoo was a close second, due largely to its management changes and newly articulated priorities and strategy. Although IAC/InterActiveCorp's (IACI; $26; buy) Ask.com rolled out some great innovations, received notable accolades, and announced a multibillion dollar extension to its partnership with Google, its segment status didn't change much in 2007.

7. We expect transactional activity involving private Internet companies (primarily acquisitions of and minority stakes taken in them) to continue throughout the year.