Following are Mr. Kessler's predictions for the Internet industry for 2011.
1. We project that U.S. online advertising revenues and online retail spending will each rise 10% next year.
2. We think Yahoo (YHOO 17 ****) will engage in at least one significant transaction intended to generate/unlock shareholder value. Possibilities include sale of the stake in Alibaba Group, reduction of its interest in Yahoo Japan, and a material acquisition (perhaps focused on international, social media and/or mobile).
3. We expect Baidu (BIDU 99 ****) to make progress toward international expansion beyond China. Further offerings in Japan and/or other Asian countries seem likely, in our opinion. We also anticipate that the company will remain dominant in China and that it will continue to benefit from Google's (GOOG 599 ***) problems in the country.
4. We would not be surprised if Google experienced further issues in China, perhaps related to the registration and operation of Google Maps.
5. We think Google's continuing string of regulatory and legal woes will include a significant penalty or loss in 2011, potentially related to the Department of Justice blocking its proposed acquisition of ITA Software, Oracle's (ORCL 32 ****) claims involving Android, and/or continuing state and sovereign inquiries related to the company's Street View feature of Google Maps. The revised Google Book Settlement, which was filed over a year ago, might not even be approved by the court (even though it was agreed to over a year ago).
6. One of Google's major global initiatives next year will be related to local advertising, in our opinion. We think a major alliance and/or acquisition is a strong possibility.
7. Getting back to books, we think Amazon.com (AMZN 181 ***) will continue to be among the biggest beneficiaries of consumers making more purchases online, and we project its sixth straight year of revenue growth greater than 25%.
8. We foresee growing competition between Amazon and Netflix (NFLX 184 **), but nonetheless forecast that the DVD-shipping and streaming-video company will increase subscribers to 27 million by the end of next year, from our forecast of 20 million as of the end of 2010 (the most recently released subscriber count was 17 million, as of the end of the third quarter).
9. We believe, after much anticipation, that Apple (AAPL 325 *****) will bring iTunes to "the cloud," allowing customers to access their music and video files using the Internet, and wireless sync iTunes with compatible devices.
10. We think the number of PayPal accounts (90.5 million as of the end of the third quarter) will exceed the number of active eBay (Marketplaces unit) users (93.2 million) next year (EBAY 28 ***). eBay could move to better monetize its payments business, perhaps via an IPO of PayPal.
11. Expedia's (EXPE 25 ****) TripAdvisor is another marquee property wholly-owned by a public traded Internet company that we think would make sense as a potential IPO candidate. However, our prediction related to Expedia is that it continues to invest in and make progress in China.
12. Given Expedia's growing assets in China and that market's strong growth trajectory, we expect priceline.com (PCLN 405 ***) to look to M&A activity focused on and in the country.
13. We also expect notable M&A actions in the Internet segment. Not only will Google remain active, but we foresee international companies looking for franchise brands and businesses, perhaps of publicly traded companies.
14. Despite the IPO market warming up somewhat in the second half of 2010, we think major social media companies like Facebook, Twitter, and LinkedIn are in no rush to become publicly traded entities. They have ample capital and flexibility for more financing, in our view, and we don't expect any of them to file S-1s in 2011.
