The internet is back. A decade after the bubble burst the web has grown from false dawn to real thing. Russ Mould clicks on the companies likely to come out on top and how investors can cash in

Ten years after the hype first began, the internet is finally delivering. Changes in how it works, what it can do and the way we access it mean the world-wide web is revolutionising the technology industry.

The incumbent leaders, in the fields of telecommunications (Vodafone), technology hardware (Hewlett-Packard), software (Microsoft) and IT Services (IBM) are feeling the heat. As new winners appear the old guard could find itself swept away.

The rise of the mobile internet is opening up new opportunities for telecoms equipment, handsets and component manufacturers and designers. Content aggregators and search service providers are also licking their lips.

New subscription-based software models are rising up, replacing the traditional licence-fee based approach, while internet-based fraud is driving demand for encryption services and IT security consultancy.

UK-listed companies such as telecommunications equipment expert BATM Advanced Communications, mobile content aggregator 2 Ergo, information management specialist IDOX and supply control software firm Kewill Systems have all embraced the internet and positioned themselves to benefit.

Shares has logged on, to look at the key technological trends and pick out which companies are set to cash in - and also those likely to lose out.

Web 1.0 and Web 2.0: the changing internet Even though it was only founded in 1990 by Tim Berners-Lee and Robert Cailliau, the world-wide web, and the identity of its leading protagonists, has already evolved dramatically.

Web 1.0, as it has been christened only with the benefit of hindsight, offered digitised content, which was generally sought out and used for reference only. Websites were static, featured no real-time data and limited graphics.

From an investment point of view, the technology bull run of 1998 to 2000 inspired by Web 1.0 was also little short of a disaster. UK businesses deemed to be beneficiaries of rising internet usage, such as Marconi, Bookham Technologies, SurfControl, and Orchestream either simply failed, were taken over at knock-down prices or suffered massive deratings as profit growth expectations were not met.

This began to change two or three years ago, when along came what has become known as Web 2.0. Its origins lay in a tool kit designed to make internet services easier and cheaper to create. Open-source software reduced the cost of operating a website and standard interfaces made it easier to connect to devices. This in turn facilitated the ability to create and offer content on a networked basis. The result has been shared, user-generated content – altogether more personal and interactive than that made available by Web 1.0.

The most obvious example of this is the rise of blogs and social networking sites, such as YouTube, Facebook and MySpace, which has prompted a new internet scramble. Rupert Murdoch's News Corporation bought MySpace for $580 million in 2005. This year has seen AOL snap up Bebo for $850 million and Microsoft launch an unsuccessful $47.5 billion bid for search engine Yahoo! Both deals have reminded investors of the internet's strategic importance and potential value.

Speed, cost and means of access

A desktop computer has been the traditional means of accessing the internet, usually via a fixed-line broadband connection. Improving broadband speeds in the UK have helped here, as speeds of up to eight megabits per second (Mbps) are now commonplace offerings from service providers such as BT, Carphone Warehouse's TalkTalk and Tiscali. Sky's Broadband Max offers 16Mbps and Virgin Media's Size:XL up to 20Mbps, for an additional fee.

Yet the advent of the dongle has made internet access over a laptop straightforward and cheap. A dongle is a small modem that, when plugged into a laptop, offers internet access, effectively negating the need for a wireline connection. Mobile operators 3 and Vodafone have pushed the technology hard, cutting their basic wireless broadband access prices while upgrading their third-generation mobile network (3G) download speeds.

Mobile network operators also hope to cash in on providing internet access via mobile phones. This is creating an opportunity for handset manufacturers and their so-called 'smartphones,' which facilitate access to the web.

Products such as the Apple iPhone, Research in Motion's BlackBerry and Nokia's N95 and 6110 phones still represented less than 10% of the 1.2 billion-unit global mobile phone market last year.

But further penetration is expected as the phones get cheaper and consumer familiarity increases. Apple's plans to scrap revenue-sharing deals and permit operators to subsidise the new iPhone, tailored to work on third-generation mobile networks, should help here. Exciting competitor products will soon include Research in Motion's BlackBerry Gold, Nokia's N96 and Samsung's Omnia SGH-i900.

The expectation that computers will get smaller and phones will get smarter, converging somewhere in the middle, is what has prompted microprocessor chip king Intel to champion worldwide interoperability for microwave access (WiMax) communications technology and also develop its Atom chip. Atom, previously codenamed Diamondville and Silverthorne, has been designed for use in smartphones, ultra-mobile personal computers (PCs) and is therefore potentially a direct threat to the UK's ARM Holdings, which currently dominates the market for mobile phone and smartphone processor chip designs. Its ARM1176 architecture is featured in the current generation iPhone products, and management believes its new Cortex A9 processor, which offers 16 times the performance and twice the battery life of today's smartphones, will keep the aggressor at bay. Rival semiconductor intellectual property (IP) expert Imagination Technologies will hope not, as its POWERVR SGX graphics and POWERVR VXD multi-standard high definition (HD) video technology designs are included in the Intel chip.

Accelerating rate of change

Intel's previous attempt to diversify away from its core PC market was launched in 1998 but ended in failure, when eight years later it sold its communications and applications business, which included the Hernon and Bulverde processors, to Marvell for $600 million. Yet the Silicon Valley giant is unlikely to rest easily as it perceives the planned shift from 3G to fourth-generation (4G) mobile communications technology standards as a chance to erase the memory of past failures and break into the communications arena.

4G is designed to offer broadband speeds of up to 100Mbps at its peak, and make the internet truly mobile. The initial disappointment of wireless application protocol (WAP) 1.0 at the turn of the decade should then be long forgotten.

4G network equipment will undergo trials in Japan later this year and commercial launch is planned in the US and UK around 2012. Yet this timetable could easily slip, as rival technological standards battle for supremacy. Europe's long-term evolution (LTE) technology offers an easy upgrade path from 2G, 2.5G and 3G global systems mobile (GSM) systems, but America's Qualcomm continues to push ultra mobile broadband (UMB) as an alternative. This is the latest generation of the cdmaOne and CDMA2000 technologies deployed in the US, Latin America and Asia, for second generation (2G) and 3G respectively.

This conflict could provide Intel with an opportunity to establish WiMax as a viable option for 4G mobile technology, according to Dr Zvi Marom, chief executive of broadband data and telecoms systems specialist BATM Advanced Communications. 'Google and Intel want to develop a dynamic WiMax network as an alternative to established mobile technologies,' asserts Dr Marom. 'Google knows guys such as AT&T and Verizon want to squeeze as much as they can out of the content providers, while Intel has missed the cream on mobile. The only real option against new protocols such as long-term evolution is dynamic WiMax '.

It is also an opportunity for Dr Marom's own firm. Israel-based BATM announced in May it had a breakthrough order in the US for a major 4G mobile communications network. Marom declines to disclose the identity of the customer, but it is widely thought to be Sprint-Nextel, which has plans to spend billions of dollars rolling out a 4G network based on the IEEE 802.16 standard, better known as WiMax.

Following a recent complex deal, Sprint will own 51% of the WiMax venture and fellow operator Clearwire. A group of strategic investors, including Intel, Google, Time Warner Cable, Comcast and Trilogy Equity Partners, have pumped $3.2 billion into the new venture in return for a 22% holding.

'This is good news. At the end of the day, this will definitely be an alternative for consumers, and it has enough strong players for it not to fall down,' Dr Marom argues. 'Dynamic WiMax will be a simple standard to follow, while in mobile everyone is trying to introduce LTE, UMB and so on. So there's a pretty good chance it will work. The buyer has tested our equipment for one to one-and-a-half years, and my people in our laboratories tell me it works perfectly.'

Technology cycle continues to rise...

Smartphones and competing 4G mobile technologies are just two of the key areas where the internet is shaping the global technology industry, as mobile video, mobile mapping and mobile internet search will become routine, challenging established telecoms, search engine and media distribution models.

Fund manager, Ben Rogoff, of Polar Capital's Technology Trust believes we are in the early stages of a new technology cycle and a changing of the guard is creating investment opportunities. 'Mobile data is just beginning to really kick off. Smartphones are expected to be around 17% of the market this year against 9% last year and we are very excited we are at the tipping point,' he says, before identifying two further areas where the web's role as a delivery mechanism is driving change.

The first is in mobile broadband, and the threat posed to Intel and Microsoft by smartphones and new pricing models from mobile telcos. According to Rogoff, the dongle means mobile internet access via a laptop now costs less than via broadband at home. Meanwhile in America, February saw Verizon Wireless offer unlimited monthly mobile voice calls for $99.99, a deal immediately matched by AT&T Mobility and T-Mobile.

'Intel and Microsoft controlled 95% of the world's PCs and therefore access to the internet. But not any more,' Rogoff argues. 'Early in the hype cycle, mobile bandwidth was not there and the phones were no good. Now the catalyst is 'all you can eat' pricing.'

Meanwhile, Nokia's 40% share of the mobile handset market could be threatened by Apple, Research in Motion and other new smartphone vendors. Motorola and Sony-Ericsson have already suffered shattering blows to their profits and market shares in this area. Google and Intel want to challenge telecom operators such as Vodafone and chip designers such as ARM respectively, their bids to cash in on mobile search and the rise of mobile computing as the internet means phones and computers converge.

The second is Software as a Service (SaaS), which sees firms deliver products differently from the traditional software package. First, software is not installed via a customer's server system, but is offered as a service downloadable over the internet, sometimes on the vendor's own infrastructure, on a 'hosted' basis. Second, the service is paid for in monthly or annual fees rather than via the purchase of a one-time or perpetual licence.

The advantage for buyers is the expense of acquiring the software is not taken all at once, and can be deemed operational expenditure rather than capital expenditure. This helps clients' cashflow budgets, while still yielding them required returns on investment and improvements in service and productivity.

'This blows away all the barriers to entry in the software market. It's truly disruptive,' says Ben Rogoff. 'The internet is the killer application. We have had the hype bit and now, ten years later, we have the reality.'

...but there will be losers

Smartphones and SaaS are therefore two areas where new tech winners could dislodge current industry champions, repeating similar shifts seen since the advent of the transistor and the silicon chip in the early 1960s. IBM, Oracle, Cisco and EMC have all made more than 40 acquisitions since 2000 and big tech firms, with models threatened by the internet are increasingly relying on acquisitions for growth.

'Microsoft-Yahoo! and HP-EDS mean these firms are showing their age. They are at the key incumbency point of the innovator's dilemma,' argues Rogoff. 'The incumbents are great companies but terrible stocks. Dell is the best company in a bad market, and Microsoft's bid for Yahoo! is depressing in what it tells you about its core business. If it [Microsoft] ever wants to be a growth stock, it has to go for M&A now.'

IBM and Apple are rare exceptions of firms reinventing themselves to stay afloat but thrive again. Nokia is already feeling the heat, even though it has only emerged as the dominant mobile handset player in the past ten years. The Finnish firm's decision to buy in the 52% of software operating platform Symbian it does not already own looks a defensive measure against Google's own internet search engine, Android, and Apple's iPhone.

But if an incumbent is being disrupted, someone is doing the disrupting. Software, content aggregation, security, broadband equipment and information management providers in particular should all thrive, and the UK equity market is blessed with some prime plays in these areas.

PRIME PLAYS

Broadband Equipment:

BATM Advanced Communications 54.75p

BATM is a niche provider of routers and switches for the Ethernet protocol network, the deployment of which enables telecom operators to offer faster bandwidth packet-based networks and facilitate services such as internet protocol television (IPTV) and voice over internet protocol (VoIP). The Israeli firm entered the wilderness when the tech bubble burst at the turn of the century, but it got back into the black in 2006 and has not looked back since. Even the rising shekel has not thrown the company, and last month chairman Peter Sheldon issued a trading statement saying BATM was 'exceeding expectations within all parameters, trading and financial’.

Content Aggregation:

2 Ergo 202.5p

Knowledge of online consumption habits is a potential goldmine. Phorm believes its Online Internet Exchange (OIX) is a total reinvention of online advertising by categorising websites visited by users, then generating profiles of those users. When consumers then visit pages with ads sourced from the OIX, those customers’ browsers will see ads targeted according to their profiles. Phorm insists no data is stored and user anonymity is preserved. Yet accusations of 'spyware' continue to stick, so a safer play may be the content aggregators. In a mobile context, this means Velti, WIN and particularly 2 Ergo, whose Multiserve platform provides content aggregation, delivery and billing capability to communications service providers that want to offer interactive, multi-channel content. The ability to help content providers, distributors and advertisers identify what users are interested in, then match content, is priceless, and deals in the spring to provide advertising for mobile virtual network operator Blyk and Telefonica's 02 were major coups.

Information management & Search:

IDOX 14.25p

Managing the flood of information over the internet every day is a challenge for all. Blinkx is strongly positioned in the field of video search and looks to have stronger content partnerships than rivals such as Joost and Babelgum. The Californian firm was spun out of Autonomy, widely accepted as the leader in unstructured data management, as its patented software enables companies to provide, categorise, file and retrieve data. Spring's $70 million order from an unnamed global bank suggests demand for Autonomy's compliance archiving solution could go through the roof and ensure the Cambridge firm is a rare example of a beneficiary from the credit crunch, as banks marshal their data in anticipation of both lawsuits relating to customers' sub-prime mortgage losses and fresh regulation. Small cap Infonic would like to challenge Autonomy's perceived hegemony and believes the first step is a deal with Thomson-Reuters, which embedded Infonic's sentiment analysis software into its machine-readable news offering. IDOX provides document management services for local authorities, providing a key link between citizens and the internet. Two acquisitions, CAPS and Plantech, have supplemented good organic growth and a specialisation in land, people and property leaves the £50 million cap well positioned. 'Integrating documents with case information and presenting it on the internet is real value added,' said IDOX chief executive Richard Kellett-Clarke at the time of the interims last month.

Security :

Detica 262p

Coping with information overload is one downside of the internet, the hard work needed to protect data from hackers and criminals and prevent fraud is another. GB Group's URU data capture software helps corporate users verify the true identity of potential customers, while nCipher supplies specialist encryption technology software used on many of Britain's online banking accounts, and provides protection for critical corporate data and identity management capability. Detica's expertise in fraud containment, risk management, regulatory compliance and customer management enabled the consultant to scoop a ten-year, £80 million e-Borders contract from the UK. Last year's acquisitions in the US are starting to settle although the likelihood of further investment to penetrate the world's largest security market could hold the stock back after a recent good run.

Software as a Service (SaaS):

Kewill Systems 95p

A number of firms have grasped the opportunity presented by SaaS, including SERVICEPower Technologies, Gladstone, Netcall and GB Group. Kewill Systems has successfully rolled out a hosted service to reduce its dependence on lumpy and unpredictable licence income, therefore earnings volatility. SaaS represented 27% of Kewill's sales in the year to March 2008, up from 19% a year ago, and the supply chain control software expert has good visibility going into its new financial year, despite concerns over how global economic growth could dampen trade volumes. Once maintenance revenues are included, just over 50% of Kewill's sales are recurring, and chief executive Paul Nichols has quantified revenue visibility at around 80% for fiscal 2009.

30 second internet

• Google's $126 billion market cap equals four BTs or 38 ITVs

• With a 65% share, Google dominates global internet searches says comScore

• More than 1.4 billion people were using the internet by March 2008*

• The number of people using the internet has tripled since 2000*

• English is the most used internet language, followed by Chinese*

*According to Internet World Stats

History of the internet

1945 Vannevar Bush writes in 'Atlantic Monthly' about a photo-electrical-mechanical device, called a Memex, which could forge and follow links between documents on microfiche

1960s Doug Engelbart prototypes an ‘oNLine System’ (NLS) that does hypertext browsing, email and editing. Ted Nelson coins the word Hypertext in 1965. Andy van Dam and colleagues build the Hypertext Editing System in 1967.

1980 While working at particle physics laboratory CERN European Organisation for Nuclear Research in Geneva, Tim Berners-Lee develops a project based on hypertext, to enable the sharing of information between researchers

1983 America Online (AOL) founded as Quantum Computer Services

1989-90 Berners-Lee, alongside Robert Cailliau, creates the World Wide Web, for which he designs the first browser, editor and server

1991 First web site is built at CERN and put online

1994 Berners-Lee founds World Wide Web Consortium (W3C)

1994-2004 Web 1.0: Static pages, usually one-way published media and mainly used for information access and retrieval

1995 Microsoft launches MSN (Microsoft Network)

1995-1999 First 'browser war,' between Netscape and Internet Explorer

1996 Yahoo! floats, two years after it was founded by Jerry Yang and David Filo

1998 Google founded by Sergey Page and Larry Brin

1998 America Online buys Netscape for $4.2 billion in stock

1999 Launch of MSN Messenger (renamed Windows Live Messenger in 2006)

2001 AOL-Time Warner merger consummated

2004 Web 2.0: Pages featuring dynamically generated content and changes in web design, rather than platform technology, facilitated the evolution of hosted services, web-based communities, blogs and social networking sites, featuring user-generated content

2004 Google floats on NASDAQ in a deal that values the California firm at $23 billion

2004 Start of second 'browser war', between Internet Explorer and Firefox

2005 ITV buys Friends Reunited for £120 million

2005 News Corporation buys MySpace for $580 million

2006 Google buys YouTube for $1.65 billion in stock

2007 Google buys DoubleClick for $3.1 billion

2008 Microsoft launches unsuccessful $47.5 billion bid for Yahoo!

2008 AOL buys Bebo for $850 million