When I read the headline “U.S. Internet will shrink to 2 strong players: report”, I thought, “This is why we pay analysts?”, believing the two giants in question were Google (GOOG) and Microsoft (MSFT) (post-Yahoo (YHOO) acquisition).  But, clicking on the link I realized it meant Google and Amazon (AMZN):

Sanford C. Bernstein analyst Jeffrey Lindsay argues in a 310-page report entitled “U.S. Internet: The End of the Beginning” to be published on Tuesday that Google and Amazon are best placed to withstand the current economic downturn.

“We expect two players to continue to perform strongly, Google and Amazon,” Lindsay writes. “Both Google and Amazon.com are still racking up annual growth rates in the 30-40 percent range, with only a relatively modest slowdown in sight.”

I am not sure about this, not because Google or Amazon.com won’t be dominant, but long-term, watch out for:

1) Big Media

A media company will be less clueless and opportunistic enough to make a dent and become a force online.  The Web is not really an altogether stand alone universe, it’s another medium, and someone will do the right thing.  If history and track record are an indication, it won’t be NBC Universal or Disney (DIS), but News Corp. (NWS) or CBS (CBS) have a shot. 

Mind you, when Time Warner (TWX) sold to AOL (yep, technically, AOL bought TWX in that merger), some people thought it was prescient; only after the fact did everyone say “idiots.”  Ok, maybe lots of TWX staffers thought it was dumb.  That shell shock explains why traditional media - while a likely player in the race - might not win the new media race.

2) MSFT’s $100B investment in the Web

MSFT gushes $1B of free cash flow per month, and that figure is growing.  It was about to spend some $40-50B to acquire YHOO.  I think MSFT will eventually buy YHOO (though details will remain messy due to Jerry Yang and YHOO’s board criminal behavior), and the only exit I see for Facebook is MSFT.  Right there, you are looking at $60B.

Considering that MSFT has already spent nearly $10B developing MSN.com and Live.com, along with a $400M purchase of Hotmail.com and hmm… a $6 billion acquisition of aQuantive… by the time Redmond is done, I think it will have spent $100B in building a Web division that creates as much revenue as Windows and Office do.

So, long term, nothing against AMZN or GOOG, but don’t count out Big Software or Big Media.

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Ashkan Karbasfrooshan

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