Internet 3.0: The Evolution of Interconnectivity

Alger CEO and CIO Dan Chung explains the advancement of “Internet 3.0”


Technology Insight

Winter 2019


There’s no question that the modern internet has dramatically transformed society and the business landscape since its inception in the 1990s. A brief look at the evolution of the internet illustrates why the ongoing digital revolution is increasingly disrupting legacy business models and creating exciting growth opportunities for innovative companies. From a historical perspective, we believe we are in what may be the most transformational period since the inception of the internet itself. We believe this observation is highly relevant for investors. Our research has found that highly innovative companies have potential for generating strong revenue growth, including during challenging economic periods such as the Global Financial Crisis (See chart below). The Internet’s Humble Start The start of the internet boom (often marked by the Netscape IPO in 1995, but Alger was already an investor in a more symbolic internet ancestor, America Online) through the internet stock bust in 2000 can be thought of as “Internet 1.0.” As with all new beginnings, it was a highly innovative period during which the seeds of disruption were planted across many industries such as consumer retail. But it, as with many other periods of early innovation, involved technologies that were immature, expensive or targeted to consumers and businesses that were not quite ready to adopt new products or change their habits. In the end, Internet 1.0 was the building of basic connectivity, the development of online content and the proliferation of individuals and businesses creating websites. Emerging technologies tend to be primitive and early websites were no exception. They typically consisted of static pages with content that was repurposed from marketing and sales brochures. During this period, ecommerce was born by companies such as eBay and Amazon, but it began with limited, simple categories


From a historical perspective, we believe we are in what may be the most transformational period since the inception of the internet itself.

Internet Businesses Outperformed During and After Global Financial Crisis

Growth Indexed to 100


■ U.S. Internet Ad Revenue ■ U.S. E-Commerce ■ U.S. Total Retail Trade



> 30%






Q211 Q111 Q410 Q310 Q210 Q110 Q409 Q309 Q209 Q109 Q408 Q308 Q208

Source: Bureau of Economic Analysis, PwC, Census Bureau.


and transactions (i.e., books, toys, music, used goods). The capabilities of websites advanced regarding user interactivity but online content still didn’t reflect individuals’ interests or locations, allow for more complex interactions (including targeted advertising), or provide contextual “freshness” and relevancy for the rapidly growing user base of consumers and businesses. Similarly, while ideas for the application of internet technologies to common business problems and processes were abundant during Internet 1.0, solutions that were practical and comprehensive for businesses generally were uncommon. Significant advances in an array of technologies were needed before the internet and data technologies could allow factories, warehouses and logistics to seamlessly work together so that businesses and their workforces could collaborate either internally or externally. A Powerful Inflection Point In our view, the period roughly spanning the post-bubble years of 2000 to 2010 can be thought of as “Internet 2.0.” Major technological advances occurred during this period. We think of it as the long but necessary gestation period for technology, across an array of areas, to advance sufficiently in both functionality and cost to provide the foundation for new products and services that, unlike their predecessors, could be easily adopted by businesses and consumers. In this period, the emergence of mobile computing and smartphones is particularly important, as it enabled a new computing paradigm: cloud computing or, shorthand, the “Cloud.” Thus the end of Internet 2.0 is marked by the emergence of widespread adoption of new software, services and devices as affordability and functionality, and thus economic benefit to businesses and consumers, hit the inflection point of mass market adoption. This is the point where changing past habits and processes became either natural or necessary for consumers and businesses. A Revolutionary Advancement We are now only in the early innings of Internet 3.0. We believe Internet 3.0 will be the most impactful and trans­ formative period since the very birth of the internet and

email itself. Why? Because the combination of affordable, powerful and mobile computing power and data is creating opportunities to improve or upgrade the efficiency of almost every traditional process or activity we do at work or in life – whether it is planning events, determining product design, making restaurant reservations or taking a “taxi.” As a result, companies of all sizes are innovating and offering new services and products. For example, high speed mobile data, big data analytics and the application of sensors and monitors of all types in the “Internet of Things” will result in services and changes to everything around automobiles – from service and repair to whether we even drive cars and if we work or are entertained while being on the road. In other examples, home appliances will re-order replacement parts or a pint of yogurt, manufacturing equipment will signal when repairs are needed and howmany products have been produced robotically in the last hour, and medical devices will not only monitor a patient, but also signal to doctors the need for attention or personalized care. An Exciting Future In this era of Internet 3.0, technology has become the main driver of capital spending, and the imminent arrival of ultrahigh speed 5G networks will only accelerate innovation and investing in the digital economy. At Alger, we strongly believe in investing in companies that exhibit Positive Dynamic Change, and the innovation we’re observing today is just the beginning. With that in mind, we are eagerly anticipating the internet’s limitless future. Sincerely,

Daniel C. Chung, CFA Chief Executive Officer Chief Investment Officer

Fred Alger & Company, Incorporated is the parent company of Fred Alger Management, Inc. The views expressed are the views of Fred Alger Management, Inc. as of February 2019. These views are subject to change at any time and should not be interpreted as a guarantee of the future performance of the markets, any security or any strategies managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities. Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities. Risk Disclosure: Investing in the stock market involves certain risks, and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Technology companies may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Before investing, carefully consider a Fund’s investment objective, risks, charges, and expenses. For a prospectus and summary prospectus containing this and other information or for a Fund’s most recent month-end performance data, visit, call (800) 992-3863 or consult your financial advisor. Read the prospectus and summary prospectus carefully before investing., Inc. and eBay represented 6.44% and less than 0.01% of Alger assets under management as of 2/28/2019. Distributor: Fred Alger & Company, Incorporated. Member NYSE Euronext, SIPC. NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE.

Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 / 800.223.3810 /



Made with FlippingBook - professional solution for displaying marketing and sales documents online