Has the Net Stopped Growing?

Over the past few years, hundreds of entrepreneurs have tried to convince investors they had what could be a wildly popular Internet service for consumers. They've been less than convincing. "There is no killer application; I don't think we're close," says Karyn Mashima, VP of strategy with Avaya, a software company for the telecommunications industry. "The only interesting thing I've seen anyone doing lately is on mobile phones. ... But what's that about: People downloading cartoons, and boyfriends sending good-night messages to their girlfriends."

Without a big draw, it was inevitable that growth on the Web would slow, and probably continue to do so for a while. Cable broadband company Excite@Home has found that the average time customers spend online decreased by 32 percent last year. And DSL companies have found that the number of people coming online has leveled off abruptly. With the disappearance of alternative Internet providers like the bankrupt NorthPoint Communications, the only option for many people looking to get fast online connections are local phone monopolies like SBC, which have significantly raised prices for service.

"I don't want to necessarily draw a direct line between the fact that NorthPoint's gone out of business and Covad's struggling with SBC raising their prices," says Mike Lunsford, executive VP of broadband at EarthLink. "But it seems like a pretty close relationship, doesn't it?"

Business services also have yet to provide a cure for the industry. There has been so much competition to offer services that showed a lot of promise, such as Web hosting and virtual private networking, that most of these offerings have been sale-priced before they even take off, making it nearly impossible to generate a profit. That's in part because equipment makers like Nortel have been able to increase the amount of data these networks can carry and dramatically lower costs, which has led to pricing pressures. "I just sit there, and Nortel shows up every year with equipment that quadruples my capacity for the same price," says Paul Gudonis, CEO of Genuity.

By now Internet companies have embraced this decline - according to Level 3's business plan, the company expects its prices to drop 25 percent every year - something few industries could deal with. But to compensate for these declines, Internet service providers need to put more traffic from paying customers over their networks. Most of the services will simply replace the things older telecommunications companies do, but at a lower cost. Already, Internet phone traffic is starting to take off, and applications like virtual private networks are replacing leased private lines.

Yes, the Internet is still growing. But many of the companies that helped build it are not.

No one thinks the industry will right itself anytime soon, because years of recovery are needed. The market has to be weeded down to a rational number of companies so prices can stabilize. The financial markets, whose wholesale abandonment of the sector brought on this crash landing, will have to get over their aversion to all things telecom. Unless some money flows back into the sector, the new networks and services needed to keep the Net growing and return the industry to health won't be produced.

It won't be a pretty sight, but once the devastation is over, someone might actually make money off the Net.

"We may have overcapacity now, but the pendulum will swing back the other way," says Level 3's Crowe. "The seeds of a shortage are sewn by excess. Now we have to set ourselves up for recovery."