Where Did All the Surfers Go?

Forget warp-speed growth. Net usage has hit a wall

Amazon.com Inc. (AMZN ), one of the last pure-play e-tailers, is looking a little wobblier. Sure, the online megastore announced on July 23 that it was moving closer to its goal of pro-forma profitability. But that wasn't what grabbed Wall Street. Instead, worried investors focused on the fact that once-skyrocketing revenue growth is slowing even more than expected. Not only did Amazon miss Wall Street estimates for its sales by $12 million, but the outlook for the second half of the year is worse. Instead of jumping the expected 20% to 30% this year, the company said revenues will rise by only 11% to 16%.

While some of Amazon's troubles are homegrown, its latest hit reflects a broader trend: The speed-demon growth rates that the Internet once boasted appear to be over. The number of people online in the U.S. dropped for the first time in June, according to traffic-monitoring service comScore Networks. All told, the combination of lower adoption rates by newcomers to the Net and a fall in online time by college students sent the number of users down 3%.

Other Net data paint an even gloomier picture. The amount of time that the remaining users spend online each day is growing more slowly. In June, Net use by individuals was up just 14.7% year-on-year, compared with a 46% growth rate in January, according to Lehman Brothers Inc. Making matters worse, one of the Web's most popular sites, music-sharing service Napster Inc., has been crippled by lawsuits. Napster drew 5% of overall Net traffic in February, estimates Media Metrix. By June, that fell to just 1%.

So has Net traffic reached its peak? Probably not. But the Web does appear to be going through the same cycle that afflicts most new tech devices: periods of fast growth alternating with plateaus during which sales stall until some innovative software or other advance sparks new interest. PC use, for instance, experienced a period of rapid growth among early adopters, slowed in the late '80s, then reignited in the early '90s with the advent of computer networking and the rise of the Web. "It's a chasm where sales take off, and then they are dead in the water," says Rashi Glazer, professor at the University of California at Berkeley.

The Net now seems to fit the pattern. In its early years, consumers logged on at hyperspeed. U.S. households online soared from zero to about 50% in six years, says International Data Corp. PCs took 18 years to reach the same penetration. The early attractions of the Net were plentiful: It offered innovative and easier ways to shop, find information, and communicate. Internet service providers also attracted users with free service, and Web retailers tempted them with bargain-basement prices.

Many of those lures are now gone. These days, subscription prices for Net access are going up. AOL (AOL ) in July raised its monthly rate 9% to $23.90. And major broadband providers have added up to $10 to the cost of high-speed service, bringing that monthly tab to $45 to $50.

"PRICE-SENSITIVE." Moreover, the novelty of the Net has faded quickly, even as once-fashionable assumptions about what makes the Net compelling have fallen by the wayside. Amazon ceo Jeffrey Bezos long contended that consumers use the Net for convenience, not cheaper prices. But Amazon's own revenue shortfall, which follows a hike in pricing on new books, seems to undercut that claim. Convenience, apparently, isn't as appealing during an economic slowdown. "We've been trying to figure out how price-sensitive book demand is online, and now it looks like the answer is, really sensitive," says Austan Goolsbee, an economist at the University of Chicago.

Still, some analysts believe the Net could reach 70% to 80% of U.S. households within five years--up from 50% today. That's 25 million households not yet online. But to get those folks surfing--and to persuade existing users to spend more time online--new lures will be needed. Wider availability of easier-to-use, speedier Net access could be a big draw. Although the growth of high-speed digital subscriber lines has been much slower than expected, things could be picking up. The Yankee Group, a Boston-based researcher, expects broadband subscriptions to double, to 11 million, this year. But unless costs come down, many families aren't likely to sign up.

The outlook is even murkier for other technology expected to renew consumer interest. Certainly compelling new software, such as advanced instant messaging or new video and music services to replace Napster will help. But record companies have yet to come up with attractive alternatives to the free music-sharing service. It will only be when creativity returns that the Net will be able to clear the chasm.

By Heather Green in New York

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