U.S. Internet Growth Rate Coming to an End?
I've been sitting on this observation for a few months, partly procrastinating and partly because I wanted to be sure that this wasn't something obvious that lots of other folks have been pointing out already. In August, I saw an article on Internet.com's Advertising Report that made me think I might be mistaken. Quoting comScore data, they reported:
The company's July traffic figures showed the [total U.S. Internet] audience grew 29 percent compared to the same period in 2001, and 2.2 percent compared to the previous month.
The news should be heartening for online publishers and marketers, who are staking their businesses on the idea that the audience is growing, and advertising dollars must eventually follow.
I called comScore to check on this, and it appears Internet.com was mistaken, apparently mixing up incomparable data sources owing to comScore's recent merger with Media Metrix.
Nope, it's official: the Internet's penetration of the U.S. population seems to have crapped out at around 60-65%, for the time being anyway. The days of double-digit growth are over. As recently as December, 2000, Nielsen//NetRatings showed that the total number of U.S. residents with access to the Internet was still growing at more 30% year over year. By September 2001, that year-on-year growth had slowed to below 15%. March and June of this year were actually in negative territory compared to the same periods the year before. And the 63% of the U.S. population online as of September 2002 is still less than the 65% last December. (These numbers are Nielsen//NetRating's published estimates (ages 2 and up) as a percentage of an estimated 280 million Americans.)
What does this mean for e-businesses? Well, if you built a model that presupposes lots more Americans are coming online soon, as the Internet Ad Report story above suggests, you could be in trouble.
Let me temper this alarm with a bit more statistics, if I may. Thanks to the magic of cumulative annual growth rates, the medium's penetration among new users does not, in fact, have to keep growing at double-digit rates to continue a steady penetration of the entire population. Assuming 65% of Americans are online in 2002 and a 5% annual growth rate, that penetration would reach 75% of the population by 2005 and 87% by 2008.
On the other hand, the U.S. Internet population may not continue growing much at all. What you see may be what you get, for the time being anyway. That may not be the most likely scenario, but it is a real possibility that e-businesses must consider. The Internet may not break 70% of U.S. households for a long, long time, if ever. Consider that cable television, more than 30 years after its market introduction (it was actually invented back in the '40s), has to date penetrated only 70% of U.S. households.
Back when I first published my Executive Summary newsletter in 1998, when less than 30% of the population was yet online, I rashly predicted that it would take at least five years for the Net to reach 50% of households, and that it would likely never reach more than 70%. Okay, according the U.S. Census Bureau, it reached 50.5% three years later (by Sept. 2001). Bear in mind, however, that the 63% of Americans that NetRatings projects are now online includes both infrequent users and those who connect outside of the home (mainly at work).
My reasoning back then for being more pessimistic than most other analysts about the Net's future popularity in the midst of the boom came down to one fact: computers still pretty much suck. I wrote my article back then in a fit of pique after hours of troubleshooting trying to connect to the Net. I still know the feeling. Earlier this year, I went months without my printer working or my Palm Pilot syncing due to confounding software glitches. Only after 45 hours on the phone with various companies' tech support and finally re-installing Windows and buying a new printer did I get everything working properly again, more or less.
Compared to what we think of as traditional media and communication technology -- the television, the telephone, radio, newspapers -- computers are still damn difficult to use. And the idea that they are going to get any easier to use anytime soon is a fantasy. They are infinitely more complicated for users than televisions and telephones, and they are likely to remain so for many more years to come.
Plus they cost about $1,500, in addition to another $250-750 per year for ISP services. The "under $1,000 PC" is more bunk, particularly when you include a monitor, a printer, extra memory, etc. Computers are expensive (compared to $200 TVs at Good Guys), and it's simply not a proposition every American family can still easily afford.
Don't get me wrong, I'm all for the Internet. Obviously. I hitched my wagon to it professionally six years ago. But I continue to be disappointed by how frustrating computers still are to work with.
My dear friend Mike, the best man at my wedding, is a cabinet maker who drinks Budweiser. He has a college degree, but he can't type. He has been saying for years he'll get online as soon as you can talk to computers like on Star Trek. He now thinks he'll break down sooner, although he's in no hurry, maybe next spring or summer. He's dreading it, and I don't blame him. Another friend, a section editor at a major NY newspaper in her late 30s, started using the Web only in the last couple of years and still just from work. She and her lawyer husband just don't see the point of Internet at home still. I doubt she's ever made an online purchase yet.
Yes, Generation Y, yadda yadda, but most of those consumers are not going to be laying out the $60 a month for broadband access or e-commerce purchases themselves for several more years. They're still kids.
Also, according to NetRatings, the "active" Internet users who actually surfed in August from either home or work was 122 million Americans, or only 44% of the population.
Bottom line: this is not yet a mainstream medium in nearly the way newspapers, magazines, radio or television are. Seventy to 80% of the U.S. population reads magazines and newspapers monthly, and upwards of 90% regularly watches TV and listens to the radio. The Internet may not reach those kind of levels for 10 years or more.
Face with that grim possibility, can e-businesses -- online merchants, e-publishers, and other Internet marketing and media ventures -- survive if the local domestic market stops growing? Already, we've witness massive die-off and industry consolidation among e-businesses, and many are still struggling to hold on to what they have built. If they can no longer rely on a rising tide continuing to lift all ships, what should they do to secure their viability given the status quo? Here are some ideas:
- Focus on Increasing Market Share: If the U.S. user base is not growing much anymore, and your business depends largely on that customer base, it's time to pull out all stops on competition for market share, as the U.S. audience base may increasingly become a zero-sum game. Acquire, merge and/or otherwise get ruthless (to what extent you've been pussyfooting till now), because the existing players are going to be the key competitors from now on.
- Increase Loyalty and Frequency of Existing Customers: If the only way to grow your U.S. user base anymore is poaching from competitors, improving the value of your existing customer/visitor relationships is more important than ever. E-media and marketing firms need to invest in programs that get visitors back more often and increase the value of those interactions.
- Get Better at Extractive Value From International Visitors: Many online merchants and e-marketing companies have not done all they can to cater to visitors from other continents. Shipping and service logistics, language issues, localization requirements, distributed proxy servers, regional customer support, alternative payment solutions and other issues make doing online business in foreign markets challenging. Given that international rates of Internet adoption are continuing to grow, however, these customers abroad will represent market growth for the next several years and can increasingly supplement revenues from the domestic market.
Most online media companies also currently undervalue international visitors, who in many cases make up a third or more of site traffic. To the limited extent that online media companies do target advertising to audience segments at all to date, they often intentionally exclude international traffic from premium ad buys, on the assumption that those visitors are unlikely to become customers for their advertisers. If overall traffic growth is increasingly going to come from international traffic as U.S. visitor numbers stagnate, then media companies must get more creative about packaging the value that overseas surfers represent to their advertising partners.
- Improve Knowledge of Existing Customers/Visitors: Most e-businesses and e-publishers still get low marks for delivering on the promise of CRM and using actionable profiles for their online audiences. There is really no excuse for this anymore. Enough companies are demonstrating success with these kinds of programs that the laggards are going to have to get on the ball fast or find themselves at a critical competitive disadvantage.
- Recognize the Premium Quality of the Broadband Segment: As the total market for U.S. Internet users may be slowing, the value of broadband users is that much more important for e-businesses. Presently, comScore and NetRatings agree that 25% of home Net users are now on broadband, up from 20% in Sept. 2001, according to the U.S. Census Bureau. After two years of doubling year-to-year growth, even if broadband grows only 25% in 2002 over 2001, that is still a fast trajectory. It seems reasonable to project that more than 40% of Internet households will be using DSL or cable connections in the next 3-4 years, which would be more than 20% of all U.S. households overall.
For media companies, marketers and merchants, broadband is a great quality filter: these are your best customers. Plenty of research shows that those with high-speed connections take advantage of all the Net offers considerably more so than those with 56Kbps modem connections. For merchants, faster Internet connections may not significantly improve the shopping experience, but it is likely that targeting those users with high-speed connections (e.g., via segmented campaigns or rich media ads) will yield the highest-value customers -- those who are so committed to the Net and have adequate discretionary income that they will pay the considerable premium fees for high-speed connections.
Media companies, meanwhile, should recognize that high-speed users want more than just words and pictures. They are much more experienced with the Net and are interested in richer multimedia experiences, steaming media, audio, video, animation and other creative new ideas that surprise them. The Internet has not yet lived up to all our expectations. Media companies must continue to push the envelop with new ways of presenting information and entertainment online.
All that said, maybe I am being Chicken Little. Maybe the Internet is just taking a breather, and shortly a new wave of cheaper computers, lower bandwidth fees and compelling content will drive the balance of the American public online, who, for now, stubbornly don't seem interested in this whole e-revolution, nearly 10 years after it first started making headlines.
Just to confound you, I'll leave you with this stat that negates most of my pessimism expressed above: the Internet is to date the fastest growing consumer medium in history, tied only with the adoption rate of black-and-white television in the 1950s.
A stat I unearthed while doing research for the Online Publishers Association, from John Cary, a Columbia University-affiliated telecommunications expert, shows the number of years it took for the various mass media and communications technologies that dominate our lives to reach 50% penetration of U.S. households. Newspapers took more than 100 years. The telephone, 70 years. Cable TV, nearly 40 years. Personal computers, 20 years. VCRs, 10 years. Black and White television took only eight years, from 1947 to 1955, to reach 50% of all U.S. households.
According to the U.S. Census Bureau, 50.5% of all U.S. households had at-home Internet connections by September, 2001. Marc Andreessen wrote the first version of the Mosaic browser while a graduate student at University of Illinois in 1993. That is eight years, same as TV.
So perhaps I'm all wrong. Maybe there's hope for the Internet yet.
- Rick E. Bruner is president of Exectuive Summary Consulting, Inc., offering Internet media and marketing strategic consulting, research and analysis at ExecutiveSummary.com.