Markets & Finance

Seven Internet Predictions for 2007


Among the trends to watch is Google's relationship with Apple, market share gains for Ask.com's search engine, and more deals for private Internet outfits

From Standard & Poor's Equity ResearchDespite this era of instant gratification, I don't think anyone has yet created a device or application that can predict the future (unless you count Michael Jennings from the 2003 movie Paycheck).

So even though you'll have to wait to see if our seven Internet predictions come true in 2007, you won't have to wait to see them, as they are listed below in no particular order.

1. Comcast (CMCSA; ranked 4 STARS, buy) will further establish itself in the Internet portal market with material partnership developments. However, we don't expect significant acquisition activity. Who would have figured that Comcast would garner more U.S. traffic than Overstock.com (OSTK), Facebook.com, and iVillage.com (according to November, 2006, data from comScore Media Metrix), and has been a top-10 search provider (based on number of U.S. searches, according to Nielsen//NetRatings)?

2. Google (GOOG; ranked 3 STARS, hold) will strengthen its relationship with Apple Computer (AAPL; ranked 4 STARS, buy). Google Chief Executive Officer Eric Schmidt was named to Apple's board in 2006, and we believe that portends greater collaboration between the two companies in 2007. We expect new joint initiatives to include efforts related to search advertising and YouTube content.

3. Google's efforts beyond Internet search and contextual advertising will continue to deliver only mixed results. A lot has been made of Google's grand aspirations to pursue the global advertising market. The company has gotten involved in more traditional media, such as magazines, radio, and newspapers, but we remain skeptical, in part because we think these businesses are largely based on personal relationships. Google is obviously trying to change that. We also believe the company will scale back some of its existing offerings and the pace of new product and service introductions.

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.

5. Although the November elections bolstered the chances for a new net neutrality law, we don't expect one to be enacted in 2007. However, we expect the Federal Communications Commission to push this issue and promulgate related policies next year.

6. Despite Google's leading market share, Yahoo!'s (YHOO; ranked 3 STARS, hold) Panama launch, and Microsoft's (MSFT; ranked 3 STARS, hold) substantial search-related investments, Ask.com, part of IAC/InterActiveCorp (IACI; ranked 3 STARS, hold), is the search engine to watch in 2007. We foresee market share gains, news regarding innovations like Ask X, and progress in paid listings.

7. We expect transactional activity involving private Internet companies (primarily acquisitions of and minority stakes taken in them) to continue throughout the year. We have talked and met with a number of interesting private companies over the past year. In fact, one of them, Ardence, recently announced plans to be acquired by Citrix Systems (CTXS; ranked 5 STARS, strong buy). Among companies that have products and services we find interesting are online video company BrightCove, Internet classifieds firm LiveDeal, casual gaming company PopCap, and local Internet advertising company WebVisible.

Kessler follows technology stocks for SP Equity Research.

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