If Internet Traffic Matters . . .

Alexa.com (an Amazon company) is a handy reference for insight into Internet usage patterns. Here are the current Global Top 15 Internet sites, ranked by average daily "Reach," which is the percentage of all worldwide users who visit the particular website:

(To compare growth, I give Rank and Reach two years ago (Jan-2003) in parentheses.)

1. yahoo.com (1), 30% (30%)--U.S.
2. msn.com (2), 27% (24%)--U.S.
3. google.com (5), 17% (10%)--U.S.
4. passport.net (7), 14% (9%)--U.S.
5. sina.com.cn (13), 5.5% (3.0%)--China
6. baidu.com (150), 4.0% (0.4%)--China
7. sohu.com (16), 4.0% (2.0%)--China
8. yahoo.co.jp (7), 3.8% (3.8%)--Japan
9. 163.com (20), 3.5% (1.8%)--China
10. ebay.com (10), 3.5% (2.5%)--U.S.
11. microsoft.com (9), 7% (7%)--U.S.
12. 3721.com (50), 4.0% (1.5%)--China
13. qq.com (--), 2.5% (0%)--China
14. daum.net (3), 1.5% (13%)--Korea
15. amazon.com (18), 2.8% (2.2%)--U.S.

Trends over the past two years are clear:

* New to the Global Top 15 during the past two years are five Chinese Internet companies: three portals (joining Sina, which itself has risen from 13th to 5th place)--Sohu, NetEase (163) and Tencent (qq)--and two search providers, Baidu and 3721 (Amazon has also moved into the Top 15);

* Search has advanced in the rankings, as evidenced by Google (moving from 5th to 3rd position), Baidu (zooming all the way from 150th to 6th) and 3721 (jumping from 50th to 12th);

* Within any country (actually categorized by language), the relative ranking of sites in the Global Top 15 has remained essentially unchanged. Two years ago the English language ranking among these sites was, and still is today, in the following order: Yahoo, MSN, Google, passport.net, eBay, Microsoft, Amazon. Similarly, among the top Chinese portals (not including the search sites, Baidu and 3721), the order today is the same as it was two years ago: Sina first, Sohu second and NetEase third (Tencent has risen rapiply from unknown status but has not surpassed the top three). In Japan, yahoo.co.jp remains number one. In Korea, daum.net still occupies the number one slot.

To sum up our observations:

* Chinese Internet usage is growing by leaps and bounds;
* Search has become increasingly important;
* Market leaders tend to remain market leaders.

This simple study of Internet traffic trends points to a "sweet spot" for investment: Buy leading Chinese Internet companies, particularly those specializing in search. With Baidu being a private company (alongside a number of VCs, Google took a minority position in Baidu last year), a good alternative investment is the leading portals--Sina, Sohu and NetEase--all of which have publicly listed shares trading on Nasdaq.

We are still in the very early days of the Internet, especially in China. As have Yahoo, Microsoft, Google, eBay and Amazon before them, the Chinese Internet companies will almost certainly find a way to convert their increasingly heavy user traffic into much more profitable enterprises. Chinese demographics (population of 1.3 billion) and economic growth (GDP still growing at 9% annually) indicate a very promising future. More users will drive more revenue and profit and, in turn, higher market capitalizations and share prices for the market leaders. In my opinion, Chinese Internet usage trends are so strong that, even with the recent regulatory setbacks in the Middle Kingdom (e.g., revoking of Sohu's mobile content license, halting of Sina's radio and TV advertising over fortune-telling concerns, and lower revenue sharing percentages in contracts with China Mobile), these young companies will most likely find a way to prevail--and enhance shareholder value.

I think it very likely that the valuation gap between the leading U.S. Internet companies (Yahoo, Google and eBay all have current market caps around $50 billion) and their Chinese counterparts (Sina and NetEase have market caps around $1.2 billion, while Sohu's is about $550 million) will narrow over the years ahead. I would not at all be surprised to see the leading Chinese Internet portal a few decades from now attain a market cap surpassing Yahoo Japan's (which today is around $40 billion--and keep in mind that Japan, while of course considerably more affluent than China, has only about one-tenth the population of China).

In the short run, the share price of any Internet company is likely to experience considerable volatility. However, in the long run, it seems to me, market cap should approximately follow user traffic.

(Disclosure: Among the companies mentioned, I am long Yahoo, Sina, eBay and Amazon.)