The Word We Do Not Want to Hear

There’s a word that begins with the letter “c” that we hate more than Communism. It’s more important to our future than Christmas and represents the true capitulation stage of capitalism.

That word is “consolidating.”

We’ve been hearing this word a lot lately. The Internet industry is consolidating. Stocks like Yahoo are consolidating at lower levels.

Merriam-Webster defines consolidate as “to join together into one whole,” “to make firm or secure,” and “to form into a compact mass.” It’s also used as a synonym for “merger,” as in “the two companies consolidated.”

But the dictionary definition doesn’t really do justice to the concept. An industry that’s consolidating is not in a happy place. Mergers happen all the time, in good times and in bad, but the “c” word doesn’t hold the same sting in good times as it does now.

When companies consolidate in times like this, you can be sure that the next step is that functions will consolidate and jobs will consolidate. It’s expected that choices will consolidate, too – that there will be fewer of them for everyone.

The result of consolidation is that you have fewer, larger, more powerful competitors in key niches. This can be a good thing. It means you can get truly professional service from people who know what they’re doing.

But my point today is that it’s also a temporary thing, especially in this case.

The Internet industry isn’t contracting, it’s expanding, and it’s still expanding at a rapid rate. While the U.S. industry seems mature, since most people who want Internet connections can get them, connections are just the beginning.

Broadband’s market share is still minimal. It’s still at the start of the “hockey stick” curve, where growth accelerates and profits should be at their maximum. As quickly as telephone and cable operators are moving to install digital subscriber line (DSL) and cable modems, independent Internet service providers (ISPs) are moving faster to install fixed wireless systems that will bypass those lines and offer the same speeds, but at lower and declining costs.

As broadband service grows, so does the need for fiber capacity. The capacity of fiber is increasing, too, but demand is so frenetic that even more cables are being laid. Equipment to switch those signals, and to move electrical signals on and off the light system, is selling like cold beer at a summertime baseball game.

Internet commerce is still growing quickly and so is Internet advertising. It’s true that as numbers get bigger, they can grow faster in absolute terms but slower in percentage terms. When 7 becomes 10, it’s a bigger jump than 1 going to 2 in absolute terms, but it’s a smaller percentage jump; and, as a result, speculators are going to prefer owning shares when 1 is going to 2. It’s illogical, it’s even silly, but that’s how numbers work.

So don’t worry, be happy. Consolidate away, and when this phase is over, remember that the winners will just be bigger, hence dumber and hence easier for small companies to niche out of new markets.

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