Future of the Internet (1996)

Note: The portions of the Internet other than the World Wide Web are excluded from these predictions as they are largely inaccessible to the majority of potential customer and also do not carry significant amounts of commercial activity.

Current Situation and Analysis:

The phenomenal growth of the Internet, both as a communications tool and as a community in and of itself, has provided an opportunity for commercial organizations to expand their market reach by virtue of corporate pages on the World Wide Web (Web) that provide contact with customers otherwise not exposed to their advertising. The large and quickly growing number of pages owned and run by financial service companies lends credence to the expectation that on-line transactions will comprise an important sector of this industry’s market share in the future; companies unable to provide their services electronically will loose overall market share to those who can and do, especially as the Securities and Exchange Commission (SEC) gives the green light to electronic trading. Thus there has been a great rush for companies to establish home pages which (1) generate leads, (2) provide data and information to keep potential consumer interest, and (3) provide for electronic transactions. Finding and informing potential customers electronically requires fewer employees, lowers printing and mailing costs, and allows companies to “keep more of the take” as potential customers pay for network connections and software that would have to be provided if private networks were used.

A fringe benefit of the deluge of financial Web sites is the increased availability of a variety of inexpensive or free financial data and information to any Internet user. However, just as the very nature of the Internet is dynamic, the existence and availability of financial data and information is in a state of flux and will be for some time to come. Currently magazine, newspaper, and Web site authors all seem to agree on one thing: the number of sites offering financial data and information is rapidly increasing and while this does not mean that the amount of data net of replication is increasing it does mean that the amount of data derived information (data presented in different manners providing different interpretations) available is increasing sharply. This data and information is not immune to normal market forces for quantity and price and as the number of competing data and information providers increases, market pressures are reducing the price, often to nothing; Firm A simply cannot sell the same data that Firm B is giving away.

However, even as the price to consumers of financial data and information falls, the costs of providing that information remain constant, and somewhat staggering. It costs between 1.4 and 4 million dollars to set up a Web site that both provides financial data and information and allows for electronic transactions.¹ While maintenance costs are somewhat lower neither they nor the initial cost can be ignored when predicting the availability of data. Additionally, a commercial site that supports information but not transactions costs between $600,000 and $800,000.² Thus, economically, data cannot remain entirely gratuitous to the consumer.
While overall revenues from Web sties are nearly four times expenditures for site development, external storage, and maintenance³ the current consensus of Web masters for financial sites is that the majority of sites in this category are losing money–customers are not willing to pay for information and data and electronic transactions are not yet universally feasible. As the companies sponsoring sites, aside from the federal government, do so in the hope that the advertising value of the site will increase revenues and decrease costs enough that the site will prove a profitable venture, as time passes they will require that sites be financially viable. The increased revenues necessary may derive from increased transaction volume, selling on-site advertising space, venture capital, the collection of subscription or user fees, or the deep pockets of a large company.
The majority of financial sites have devoted portions of their space to advertisements, both for products of their own and products of other companies, and more advertisements are appearing on a regular basis. However, other categories of sites on the Web also require financial support and currently the supply of advertising sites is greater than advertisers’ demand, keeping advertising revenues low. User fees, or subscriptions, are in much the same situation–the supply of data and information is much greater than the demand, making it necessary, as well as difficult, for companies to convince consumers that their particular subset of data and information exceeds their competitors’ in quantity or quality and thus merits the price.

With so many companies competing for the dollars of a finite number of advertisers and/or users in order to maintain their Internet presence it seems likely that many sites will be unable to recover either their set-up costs or their maintenance costs and have to close down. This would reduce the financing pressure on surviving sites without necessarily affecting the overall amount of data available due to the replication factor. However, as the presentation of data implies interpretation consumers may find that the overall quantity or quality of information decreases.

While the financing pressures for the remaining sites would have decreased it is not necessarily possible to predict the ultimate source of funding. Consumer desire may become the determining factor; as the availability of information decreases will consumers tolerate user fees or advertising, or a mixture of both? Even if user fees become common a certain core of data and information may remain free as an enticement to potential customers.
The validity or accuracy of available data and information should not be adversely affected by either the reduction in available quantity or the source of funding. Many print sources whose funding derives from both advertising and subscriptions currently provide this type of information. Consumers are quick to identify the biased or inaccurate and switch sources. Additionally, any company publishing investment advice, whether on paper or electronically, is subject to the regulation of the SEC. The SEC has issued, in the past two months, both statements and technical amendments to the Securities Act of 1933, the Securities and Exchange Act of 1934, and the Investment Company Act of 1940 to provide “guidance in using electronic media to fulfill broker-dealers’ obligations to deliver information upon request and investment advisers’ disclosure delivery obligation.”⁴

Conclusions:

The number of financial sites currently available cannot continue to be supported by current funding mechanisms and levels. The financial sites that survive the incipient shake-down will be those that offer the most services at the lowest cost or those whose sponsors consider the site a valid advertising expense. Other companies may continue their Web presence while reducing costs by renting space from Web service providers that already have financial data and information available to the consumer such as NETworth and Nest Egg.

Sites will need to draw customers with unique information or services and keep them with copies of information and services available elsewhere. While this many not affect the types or quantities of raw data available it may well affect the presentation, interpretation and cost. As long as federal government agencies maintain their sites in a format free to users raw data will remain free. However, raw data does not constitute information so a place will still exist for data and information put up by companies and financed by advertising or user fees. This should not compromise quality provided competition, in the form of alternate sources, remains.

It is important to note that the hinge point for the existence of company supported financial Web sites, and thus data and information, individually and as as a whole, is the viability of electronic transactions; should electronic transactions prove impossible or non-sustainable Internet customers will no longer represent a significant source of income and that sector of the market will not be cultivated.

Bibliography:

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(May 23, 1996 ) “Internet Chitchat Contributes To Iomega’s Spectacular Rise”, The Wall Street Journal Interactive Edition. <URL:http://www.wsj.com/>

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O’Connell, Vanessa. (June 17, 1996) “Stock Answer”, The Wall Street Journal: The Wall Street Journal Reports: Technology, p. R8.

Securities and Exchange Commission. (May 9, 1996, Last Updated May 10, 1996) Release No. 33-7289, 34-37183, IC-21946; File No. S7-31-95, “Use of Electronic Media for Delivery Purposes”. <URL:http://www.sec.gov/rules/final/33-7289.txt>

Securities and Exchange Commission. (May 9, 1996, Last Updated May 21, 1996) Release No. 33-7288; 34-37182; IC-21945; IA-1562 File No. S7-13-96, “Use of Electronic Media by Broker-Dealers’, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities and Exchange Act of 1934, and Investment Company Act of 1940”. <URL:http://www.sec.gov/rules/concept/33-7288.txt>

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Footnotes:

1 Vanessa O’Connell. (June 17, 1996 ) “Stock Answer”, The Wall Street Journal, The Wall Street Journal Reports: Technology, p. R8.

2 Ibid.

4 Securities and Exchange Commission. (May 9, 1996, Last Updated May 21, 1996) Release No. 33-7288; 34-37182; IC-21945; IA-1562 File No. S7-13-96, “Use of Electronic Media by Broker-Dealers’, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities and Exchange Act of 1934, and Investment Company Act of 1940”. p. 1.<URL:http://www.sec.gov/rules/concept/33-7288.txt>

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