As managing director of Internet research at Goldman Sachs, few people have had as good of a view as Michael Parekh on the Internet sector's turmoil. BusinessWeek's Ben Elgin recently caught up with the 19-year veteran of the noted investment bank to discuss the Internet's future outlook. Here are edited excerpts of their conversation:
Q: Are we witnessing the death of the Internet stand-alone?
A: No, we're not. But we're seeing more and more combinations of old- and new-economy business models coming together...either through acquisitions or partnerships. It's the blended models that have the most chance for success. The best example is AOL Time Warner. That's not to say that Yahoo! needs to merge with somebody. This can also be done through partnerships and joint ventures.
Q: What would it take to spark another generation of viable Net startups?
A: The challenges are certainly greater now than they were four years ago. The biggest thing is you need a lot more scale and heft right away to be successful. When companies like Amazon and Yahoo! were growing four years ago, the number of U.S. households online was around 18%. Now it's over 50%. You have to have a much stronger infrastructure in place to succeed. The scale at which people are coming onto the Internet makes it more difficult.
It will be two or three years before things open up again for consumer Internet [startups]. A lot of work has to be done building the foundation, improving the Internet's infrastructure, increasing bandwidth. Until the foundation of Internet infrastructure gets built out, we're not going to see any consumer Net companies emerging.
Q: How will the business models change?
A: The challenge of moving from free to paid Internet services is nothing new. Ever since 1994 and 1995, people have thought free content and services on the Internet was their God-given right. It was life or death for AOL in 1996 and 1997 when they switched from a metered rate to a flat [billing] rate. It's going to be difficult. Changing customer behavior isn't an easy thing to do. But it's got to eventually happen.