• by Wendy Davis , Staff Writer @wendyndavis, February 7, 2006

Why did Internet companies turn in a disappointing fourth quarter? A major factor is that their technology investments outpaced revenues, according to a report issued this morning by Merrill Lynch.

"Clearly it is a good time to be an Internet software engineer," states the report, "Upping the Internet Technology Ante," by research analyst Justin Post. Online retailer Amazon and search company Google in particular increased their tech spending this year, with Amazon increasing spending by 62 percent, to $448 million, and Google more than doubling spending to $493 million.

Overall, Internet companies covered by Merrill Lynch--including Google, Yahoo, eBay, Amazon and Expedia--increased technology and development spending by 60 percent last year. This year, Merrill Lynch forecast an increase in tech spending by 42 percent this year, compared to 29 percent revenue growth.

But these investments ultimately should prove a boon to the companies by helping them stave off competition from new players, according to the report. The additional tech spending "is creating improved consumer experiences which could convert to sustainable competitive advantages versus potential new entrants," asserts Post.

In fact, the report states that the increasing mesh between search engines and ecommerce means that companies like Amazon and eBay must invest in search tech upgrades simply to compete with Google and Yahoo. States Post: "eCommerce companies, which are not oblivious to the threats posed by Google, continue to invest in search technology to provide a more competitive commerce platform and improve first and third part conversion rates."