Rapid growth and change in this sector will continue for the foreseeable future.

The big story for the internet sector in 1Q 2011 was the exponentially growing influence of trends that have been developing for several years and are now having a disruptive impact on sector business models, including smart mobility, social networking, cloud computing and web video.

The cost of rapid change

The cost of keeping up with such rapid change can be seen in the sector's R&D and capital expenditures (capex) spending, as seen in the accompanying chart. At $1.5 billion for the trailing 12 months, the R&D median for the companies in this sector is higher than any other sector's. And median capex growth of 60% actually hides the actions of the sector's two largest companies, whose combined capital spending for the trailing 12 months ending in 1Q 2011 increased 367% YOY, most likely in response to the need to build out data centers to accommodate cloud services.

The remaining companies in the sector combined had only a 3% increase in capex. Still, the sector had the highest median market value of any sector — $42.4 billion at the end of 1Q 2011 — as well as the lowest median debt and median debt-to-equity ratio.

Key performance indicators for internet (median value), 1Q11

Outlook for the internet sector

Rapid growth and change in this sector will continue for the foreseeable future. Recent actions by internet companies suggest the expectation that social networking will have a wide-ranging impact on many industries.

Adoption of smart mobility and cloud computing is widening. And the major impact of web video on traditional entertainment models is still to come.

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