Web Adoption Slows, Broadband Grows

By all accounts, the pace of Internet penetration is slowing.

After years of double-digit growth, the rate of worldwide Internet adoption—new users coming to the medium—dropped to only 5% in 2005, according to a recent study by Ipsos Insight. In the United States, that number was even smaller.

Indeed, another firm, Parks Associates, estimates about 64% of U.S. households have Internet access today. It expects U.S. adoption will grow only 1% this year and will not reach 67% until 2009. Early projections had U.S. Internet penetration at 75% by now, a bar that has been missed even though computer costs and Internet fees have dropped dramatically.

Alarmists may see these figures and fret over the possible implications for the much-lauded Internet economy—or the ability to buy and sell physical and digital goods over the Internet. The Internet economy is particularly important to the music industry, which is placing some heavy bets that digital music distribution will turn around still-declining CD sales and usher in a new age of profitability.

Still, it's not time to run into the streets screaming. The slowing Internet growth rates do not mean that the Internet is stalling, or that all our assumptions about the consumer adoption of digital media are false.

While overall Internet growth is not as robust as in years past, broadband Internet adoption is skyrocketing. A recent Nielsen/NetRatings report found that the number of active U.S. broadband Internet users increased 28% from February 2005 to February 2006 to 95.5 million. That's 68% of active Internet users today—an all-time high.

With the rise of broadband comes a parallel increase in the amount of time spent on the Web and the amount of content accessed while doing so. Since February 2003, the average time spent online has increased five hours per month to 30.5, according to Nielsen.

Online video is particularly benefitting from this trend. MSN Video traffic grew 44% in the last year, while YouTube and Google Video now draw 9 million and 6.2 million unique visitors monthly, respectively. Video search requests on iFilm and Yahoo have tripled.

Music consumption is also on the rise. In-Stat reports that the online music market will experience "healthy growth" for the remainder of the decade, with sales worldwide expected to jump from $1.5 billion in 2005 to $10.7 billion by 2010. Jupiter Research predicts digital music will account for 16% of total recorded-music revenue by 2011.

Going further, Parks Associates says revenue from on-demand Internet content of all forms will grow 260% during the next five years to reach $9 billion in the United States alone by 2010—driven largely by the increase of broadband Internet usage and innovations in digital entertainment services.

The Internet market has matured, not stalled. Usage is reaching the point of critical mass needed to make it a stable distribution platform. The media industry would do better to focus on the changing Internet habits of those consumers actively using the Internet today than concern themselves with whether others are logging on.

Many people will just never use the Internet. Some live in rural areas where it's not available. Some are just too old to incorporate it into their lifestyle. And some are well-paid, college-educated people put off by privacy concerns or who prefer more intimate forms of communication.

According to Parks Associates, 18% of those without Internet access today remain so not because of high costs or lack of availability, but because they are simply not interested.

"Most people have heard about the Internet and have the opportunity to access it," Ipsos researcher Adam Wright says. "So what you're seeing is that those who have not yet jumped onboard aren't going to. That group of the market is not even a factor in the Internet world."

While the bad news is that these people will never buy music on the Internet, the good news is that they will not illegally download it, either. They will buy it the old-fashioned way, or not at all.

Meanwhile, those who have driven the Internet to this stage of maturity and who are upgrading to broadband are increasingly re-evaluating how they acquire media in the physical and digital worlds.

"Consumers are starting to figure out how to utilize this channel versus the offline channel," Wright says. "When do I go to a movie theater, and when do I download movies online? It signifies that if you don't have your act together or a strategy to utilize the Internet, you have to do it pretty quickly. It's a sign that you have to really start leveraging this channel, because it is mature." ••••