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Social Media: Changing Internet Behavior, Changing Opportunities

By Bolko Hohaus, Portfolio Manager & Julien Leegenhoek, Analyst, Technology Fund Investment Team, Lombard Odier Investment Managers.

It’s less than twenty years since Netscape invented its Internet browser, but let’s not forget that Yahoo’s directory approach to accessing web information was overtaken within a decade. Today the majority of US Internet users now spend more time talking online than offline, and the new trend is “social”. So it seems worthwhile understanding what is happening here? Internet users now build communities according to their common interest to access the information they seek.

This is a natural reaction to the burgeoning volume of online content available and the fact that the Internet is now central to our daily lives. Whether we like it or not, we are providing an increasing amount of our personal data in exchange for more personalized content. We’re seeing a wave of new social media companies going public. A highlight is certainly Facebook, for example, which is hoping to be the interface between users and the new, social Internet.

In our view, to simplify a more complex story, Facebook is nothing more than another portal. It tries to use its dominant role in the online social world to extract value from content areas such as gaming, video streaming and advertisers to name a few. Time will tell how successful this business model becomes. In the meantime it shows that users long for a simple-to-navigate way to organize their Internet experiences. To do so, many are prepared to share personal data deliberately (by clicking the “like” button on Facebook for example) or unconsciously (through the browser, shopping, text entry history). A problem for companies active in this area is that this behavior is changes over time and we will likely see a backlash against such data gathering.

Take real estate search. Companies such as Zillow provide real-time data on all housing transactions in a geographical area. Unwittingly, the user becomes part of a real estate search community by giving away personal data about what he or she is looking for. In return, they get targeted advertising, perhaps information through ‘chats’ and, of course, they are sharing their transaction data.

Users may become the unwitting creators of an online profile - which might be called an e-reputation. This is a tricky concept as in certain situations users may not want to publish their real name. Selling real estate may mean giving your name to certain buyers but do you want everybody on the Internet to know that you just sold your house? The same is true if you offer feedback on a political article and there are many other types of applications that expose personal preferences and this is nothing to do with online dating.

There’s real value in a business that lets people provide feedback on hotels and can group users into categories such as family with kids or frequent reviewers. Or search cinema and restaurant recommendations or cooking recipes, each offering the trade-off between personal data and more information. A new personalized Internet TV is also becoming a reality, creating a world of overlapping communities for Internet users.

So where do the real opportunities for investors lie? And which companies look good at first glance, but whose business models don’t withstand scrutiny?
Online coupon businesses, which e-mail discounted offers, demand expensive sales forces and users have a limit on how many coupons they can use in a week. There is little leverage in the business model. Both these and online gaming companies suffer from very low barriers to entry and potential regulatory challenges.

More attractive are online consumer review companies. But these have to be focused on specific identifiable areas. Yelp covers a broad waterfront, too broad – users can review any product or service. That makes the traffic tough to monetize. Tripadvisor is a quite different and more compelling opportunity. It has built up power within the travel and leisure sector which transacts a vast volume of business online. In the US, 60% of travel bookings are now made online.

The industry supplying the hardware to the Internet can be interesting to investors. Data centers and their software, as supplied by F5 Networks, Citrix Systems, Rackspace or Equinix are in demand, and problems of latency (speed), cooling and design mean they are not simple facilities to provide.

A large part of the Internet may stay anonymous or even move toward greater anonymity. The practice for illegal downloading of music or videos may also become common for other applications, providing a threat to some of the new social Internet companies.

One thing is clear: The Internet is undergoing its biggest transformation in its shortish history with implications not only for those tech companies threatened with becoming another superseded Netscape. This young media will also deeply affect industries from television to insurance and retail. Those who don’t keep up with the trend will lose out.

© 2012 Lombard Odier Investment Managers - all rights reserved.

Jeudi 31 Mai 2012