Last week we wrote about how the new year is ringing in a new era of Internet cynicism and pessimism. Among investors, consumers, and the media, there’s a pervasive sense that all the promises about the Internet have amounted to one huge, boldfaced lie — and that we’re now paying for the sins of yesterday’s overexuberance.

Given the preposterous expectations placed on the commercial Internet, this reaction was inevitable. Instead of a revolutionary and all-encompassing foundation for radically new businesses, the Internet is most often proving to be a strategic tool for supplementing smart business models — models capable of surviving even without the Internet.

Yet there are more forces at play than just an epiphany inspired by Internet revenues. For better or worse, the web world is slowing down. Some reasons for this are economic, some are rooted in technical maturity, and still others are due to industry growth and product maturity.

E-Voodoo Economics

The most dramatic developments over the past year began in the financial markets. Venture capital — its purveyors weary of the lavish e-start-up lifestyle with little visible promise of returns — stopped flowing to B2C ventures, then B2B ventures, and then just about anything with a dot-com at the end of it. IPOs stopped paying off as mere marketing strategies. The devices most often used to access the Internet — personal computers — have also experienced a significant cyclical sales slowdown.

In this new investor climate, new ideas that challenge the brick-and-mortar status quo are no longer flush with capital. Established companies and industries, once forced to answer to heavily armed barbarians at the gate, now have much less incentive to innovate and evolve their businesses at a breakneck pace.

What a Tangled Web We Weave

As companies have tried to do more with — and rely more on — the Internet, the once brutally simplistic technology that powered the web has been encumbered with layer upon layer of additional complexity. Although these layers have provided economies of scale and efficiency, they have also had the paradoxical side effect of slowing down the pace of innovation.

Publishing an enterprise web site once required only an HTML editor, a file transfer protocol (FTP) client, and a web server. Today’s web sites have extensive hooks into inventory systems, registration databases, and customer profiles; outbound email and CRM solutions; and enterprise resource planning (ERP) systems. Further, more stringent site uptime and accessibility requirements have added the complexity of redundant systems, additional hosting facilities, and parallel environments for development, testing, and staging.

And as companies devote more of their payroll to web professionals, role specialization sets in. (Remember the title webmaster?) The communication structures between Internet workers have become much more elaborate and distributed.

We aren’t saying that the technical complexities of the Internet are only getting progressively worse. But disruptive advances in technology frequently arise to counter this trend. However, who could argue that it wasn’t a lot easier to understand the American legal system when the country was young and there weren’t so many laws — and lawyers.

Building a Better Mouse Trap

As technical complexity increases, so does product complexity. The more advanced and integrated the product, the more steps and checks are required to successfully implement it.

The good news for the established players is that the barriers to entry for newcomers are very real. However, the diminishing returns on new Internet products and features are also very real.

For example, it used to be that Yahoo, like many other innovative web sites, originated ideas for killer features and applications faster than it could develop them. But as the company whittled through the list of features with the greatest potential for popularity, audience traction, and ROI (e.g., My Yahoo, free email, and financial information), its short list of new features became dominated by ideas with more limited appeal and usefulness (e.g., Yahoo Briefcase, money wiring, and broadband financial information).

There’s no shortage of innovative ideas, but many of the best out-of-the-gate web-feature ideas have already been implemented — leaving more on the 20 percent end of the 80/20 programming rule. Coincidentally, Yahoo’s greatest product innovations are now more likely to appear as the result of acquiring successful upstarts (e.g., GeoCities and eGroups) or merely copying their ideas (e.g., instant messaging and invitations).

With domestic growth rates of Internet traffic tapering off, many e-businesses are now looking internationally for growth. The notion here is that successful web systems, products, and features can be repurposed and amortized for a global audience to produce higher margins. This places an emphasis on distribution rather than product evolution. Yet it’s only a matter of time before international sites reach the same growth plateaus. Then what?

Meanwhile, it’s become less certain than ever that new product and feature developments have the greatest influence on a web site’s popularity when compared with low-innovation alternatives such as email marketing, brand affinity, and syndication. And with the increased emphasis on revenue growth, it’s also not lost that increased traffic doesn’t always correlate with increased profits.

Is the Sky Really Falling, or Are We Just Flying?

Whether it’s microchips and biotech in the 1980s or artificial intelligence and interactive multimedia in the early 1990s, hot market segments have skyrocketed and crash-landed ever since Holland went berserk over tulips in the 17th century. Many turn out to be fads, but many others leave indelible marks on the future of business. The Internet definitely falls in that latter category.

Oh sure, the Internet is a means and not an end in itself. That the Internet is no more of a business core competency than the telephone is an issue we’ve harped on for years. Yet no company can afford to continue using rotary phones.

The Internet may not continue growing at its meteoric rate, but few other markets can compare. When will we know that Internet growth has truly stalled? Start worrying when the lawyers outnumber the engineers.

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