internet
business models
text and cases
tom eisenmann
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Get Big Fast
Promise and Peril
on the Path to the Evernet
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Monster.com Value Proposition
• Job seeker
–
–
–
–
–
Lots of jobs
Better information
Sort and search
Resumé online
Free
• Recruiter
– Lots of job seekers, including “passive” candidates
– Fast cycle time
– $295 to post job (vs. $20,000+ in Boston Globe)
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Monster.com Strategy
•
•
•
•
•
Clerk to CEO career management
Long-term goal: capture headhunters’ 33% fee
Protect vertical markets
Expand globally: now in 10 countries
“Get Big Fast” to exploit network effects
–
–
–
–
Leverage TMP Worldwide client base
Spent 40% of revenue on marketing
$100 million, 4 year exclusive contract with AOL
Super Bowl ads; Olympic sponsorship; blimps!
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Monster.com Metrics
• 8 million resumés; 500,000 job postings
• 50%+ of time and money spent on online
recruitment
• $435 million in 2000 revenue
• 24% operating margin in 4Q ‘00;
40%+ projected over long term
• Monster = 80% of TMP Worldwide’s
$4 B market cap
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Boo.com
• Online sportswear retailer serving Europe and
North America
• Co-founders: two 29-year-old Swedes
• Raised $135 million from Group Arnault,
Benetton family, Goldman Sachs, J.P. Morgan
• At peak, staff of 400 in Carnaby Street, London
headquarters and offices in New York, Stockholm,
Paris, Amsterdam, and Munich
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Boo.com Strategy
• Full-priced retailer of hip, high-end sportswear
• Operating in 7 languages, 18 countries,
and multiple currencies
• 5 day free shipping anywhere in Europe or
North America
• Very sophisticated website
– Avatar (“Miss Boo”) providing product information
and recommendations
– Virtual mannequins; 360° rotation
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Boo.com: Hype Gone Haywire
• Missed May 1999 launch date by 6 months due to technical
problems (e.g., supplier system integration)
• Despite delay, spent $25 million on pre-launch publicity
• Upon launch, technical problems persisted:
high-bandwidth connection, latest browser required
• Sales: $680,000 in first 3 months, including Christmas
• Focus shifted to discounting, to no avail
• Bankrupt in May 2000
– Now part of Fashionmall.com
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Current Popular View
• Internet gold rush was fabricated by foolish
speculators, greedy VCs and bankers, and
callow entrepreneurs
• Get Big Fast strategies were inherently
flawed
• As failures mount, everyone’s getting
exactly what they deserved!
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Another view …
• It’s true that dot coms were overvalued due to
speculative excess in capital markets
• Also true that many were funded without a
clear view of how/when they’d make money
• But just as overreaction marked the Internet’s
rise, the popular view of its precipitous
decline is oversimplified and too extreme
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Another view, continued
• The Internet isn’t going away
– We’re not dealing with tulip bulbs
– We’re 7 years into a 20 year process of
networking the world economy
• Failure is normal with new businesses
– 60% of all startups fail
– One-third of VC-backed firms fail
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Another view, continued
• Along with failures, we’ve seen some brilliant
successes: e.g., Monster, AOL, Yahoo!, eBay,
CNET, RealNetworks, E*Trade, Amazon BMV,
Homestore, Travelocity
• Get Big Fast strategies are:
–
–
–
–
Not always flawed
Not new
Not unique to the Net
Not going to disappear
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Get Big Fast (GBF) Strategy
• Massive upfront investment in brand
building and customer acquisition
• Products/services often free or deeply
discounted
• Examples: Amazon.com; AOL; E*Trade;
eToys; iVillage; Netscape; Priceline
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Focus Versus Promiscuity
•
•
•
•
Breadth of customer segments
Breadth of product line
Vertical integration
Business model “hybridization”
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Why are incumbents so often reluctant
to pursue Get Big Fast strategies?
• How valid are explanations for inertia?
– Concerns about cannibalization
– Concerns about stock price impact of GBF losses
– Slow, dysfunctional resource allocation processes
• What organizational/financial structures maximize
incumbent’s success odds with GBF strategies?
– Tracking stocks/spinoffs
– Organizational separation versus integration
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Get Big Fast When …
• “Winner-take-all” dynamics apply
– Network effects (i.e., “viral”)
– Scale economies (i.e., “scalable”)
– Customer retention (i.e., “sticky”)
• And, competitive risks are “reasonable”
• And, lifetime value of customer exceeds
acquisition cost
• And, you can fund aggressive growth
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Internet Business Models
• Infrastructure
– Access providers
(e.g., Earthlink, Comcast,
DoCoMo)
– Networked utilities
(e.g., RealPlayer, Acrobat)
– Portals
(e.g., Yahoo!)
– ASPs
(e.g., USInternetworking,
Corio)
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• Destinations
– Content providers
(e.g., CNET, WSJ.com)
– Retailers
(e.g., Amazon)
– Brokers
(e.g., E*Trade, Carpoint,
Homestore, Travelocity)
– Market makers
(e.g., eBay, Monster, Covisint)
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The Evernet
“I think we’re now quite early in the building of the Evernet, this
always-on, high-speed, ubiquitous, multiformat Web. There are really
six Webs, and only one of them is deployed now—that’s the PC Web.
And last I checked there were only 180 million users of it out of six
billion people on the planet. Then there’s the voice Web, and I mean
literally voice, as in Tellme. There’s the hand Web for handheld
devices like Handspring or Palm, There’s this broadband Web, where
by the end of the year seven million U.S. homes will be getting ten
megabits of two-way Internet access for $30 or $40 a month. There’s
also the video Web, which you can see in the video servers from TiVo,
Replay, and Geocast. And finally there’s the eWeb, which is machineto-machine communication. So I think there will be just as much
innovation in the next ten years as there has been over the past few.”
John Doerr, Fortune (11/27/00)
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Infrastructure businesses remain in flux
• Which access technologies will succeed?
– Fixed access: cable vs. DSL vs. fixed wireless vs. satellite
– Mobile access: WAP vs. voice recognition; 802.11b vs 2.5 vs. 3G; PDA
vs. cell phone vs. laptop
– Interactive TV: local caching (TiVo) vs. server-based
• Who’ll develop portals for new access technologies?
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–
–
–
Access providers (e.g., cable operators; wireless carriers)
Incumbent Web portals (e.g., AOL, MSN, Yahoo!)
Equipment providers ( e.g., Palm)
Startups (e.g., Tellme; TiVo)
• Who’ll own standards for new networked utilities?
– Adobe vs. Microsoft for eBook readers
– Groove vs. others for peer-to-peer enterprise software
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Destination businesses are maturing
• Landgrab is over; winners are clear in most categories
– Exceptions: music; brokers facing disintermediation (auto,
travel, insurance); consortia launching B2B exchanges
– New access technologies unlikely to change outcomes
• There are some pure plays winners, but incumbents
have big advantages and momentum
– Content, retailing have seen the worst pure play shakeouts
– The Empire Strikes Back: brokers, B2B market makers
• Path to profitability: pricing; product pruning;
retention marketing; consolidation; international
expansion
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Two Types of Network Effects
• Connectivity-based (e.g., fax; railroads)
–
–
–
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Chat; instant messaging
Workgroup collaboration
Auctions; classifieds; B2B exchanges
Multiplayer games; MP3 sharing
• Software supply-based
(e.g., Playstation; Shockwave; eBooks)
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Strength of Network Effects
• Determined by:
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–
–
–
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Exclusivity
Heterogeneity of demand and supply
Sensitivity to aggregate participation
Costs and risks of participation
Ability to isolate segments
• Strength varies by business model
– Weak: ISPs, content providers, retailers, most ASPs
– Moderate: portals
– Strong: networked utility providers, market makers
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Scale Economies
• Cost elements
– Fixed : content production; website development
– Semi-fixed : direct sales force; G&A
– Variable: transmission/hosting; merchandise;
fulfillment; customer service
• Contribution margins vary by business model
–
–
–
–
Retailers, ASPs: 20%
ISPs: 33%
Brokers: 50%
Portals, content providers, market makers,
networked utility providers: 85%+
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Determinants of
Customer Retention Rates
• Network effects
• Competitive differentiation
• Switching costs
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–
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Hassles opening/closing an account
Retraining costs
Data reentry
Reintegration of information systems
Forfeiture of transaction profile
Disruption of “mission critical” activities
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Retention Benefits and Boosters
• Retention benefits
– Word-of-mouth referrals
– Related sales (have data to cross-sell)
– Price premium?
• Retention boosters
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–
–
–
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Personalization
Community
Investments in data entry, user ratings
Push e-mails
Loyalty programs
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“Marketing on the Net is like teenage sex.
Everybody claims they are doing it. Those
who aren’t, lie about it. Those who are,
aren’t very good at it.”
Jim Roots,
Dir. Interactive Business, Sears
Forrester, Retail Strategies, 10/98
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Retention Rates Vary By Business Model
• Low
– Content providers (few subscriptions)
– Retailers (limited basis for differentiation)
• Moderate
– Portals (chat and IM; personalization)
• High
– Access providers (hassles changing email or phone #, waiting for cable
guy)
– Networked utilities (network effects, registry settings)
– ASPs (system integration, employee training)
– Market makers (network effects, user ratings, system integration,
employee training, etc.)
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Winner Take All?
Business
Model
Access
Provider
Networked
Utility
Network
Effects
Scale
Economies
Ease of
Retention
Low
Low
High
High
High
High
Moderate
High
Moderate
ASP
Low
Low
High
Content
Provider
Low
High
Low
Retailer
Low
Low
Low
Broker
High
Moderate
Moderate
Market Maker
High
High
High
Portal
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“Reasonable” Competitive Risks?
• Full frontal assault on entrenched market
leader (e.g., Disney’s Go.com)
• Wars of escalation and attrition (e.g., online
pet supply retailing)
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Great Minds Think Alike …
• Pets.com; Petsmart.com; Petstore.com;
Petopia.com; Allpets.com; etc.
• Drugstore.com; PlanetRX; Soma.com; etc.
• Furniture.com; FurnitureFind.com; EZShop;
Living.com; Ethan Allen; Simplymodern; etc.
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International markets are
inherently more competitive
• U.S. players join local startups and incumbents
• Local players, including incumbents, have
witnessed GBF dynamics in U.S.
• Incumbents often less constrained by capital
markets (e.g., family ownership may facilitate risk
taking)
• As a result, incumbents are often more aggressive
(e.g., Telefonica; Bertelsmann)
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Lifetime Value of a Online Brokerage Customer
• Average customer’s annual revenue = $600
• Contribution margin = 50%
• Average customer life = 10 years
(= 1/(1-x) where x = annual retention rate of .90)
• Discounted present value (at 10%) = $1,500,
net of $300 acquisition cost
– Assumes no degradation of revenue due to competition
– Reflects no upside from cross-selling other services
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Phases of Investment Manias (Kindleberger)
Overtrading
- Entrants fight wars of escalation and attrition
- Early movers expand scope to exploit/sustain
valuation
Revulsion
- “Babies out with bathwater”
- Opportunities for those with cash,
courage
Euphoria
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Get It Right First When…
• Protecting quality/brand is paramount
• “Learning by doing” is important
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Get It Right First?
One miracle of the Web is that serving two million visitors costs barely
more than serving two dozen… But you can squander this advantage easily
enough, and there are plenty of Web-is-special theories to help you justify doing
so. Among these are the importance of establishing a brand, the value of being
the first mover … But the basic idea—spend big and early to make a splash and
create unstoppable momentum—is not new. It is familiar to anyone … [who
knows] the fable of the tortoise and the hare.
Sometimes the hare does win. More often, the money runs out and all
that remains is the memory of a lavish launch party … After watching this
mistake made again and again, I strongly suspect that the best thing a new
magazine can do is buy time. Time to experiment, to make mistakes and still to
have another chance … Time to acquire a flavor, a reputation, a following,
instead of trying to buy these off the shelf …
Maybe the Internet does change everything, but it seems to me that
tortoise-and-hare reasoning ought to be even more true online. Online you are
developing not just a new product but a new medium. Figuring out what works
and finding an audience for it should take even longer.
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Michael Kinsley, CEO Slate (WSJ, 8/29/00)
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CNET’s Strategic Decisions:
Focus or Promiscuity?
• Breadth of customer segments served?
– Technology enthusiasts and IT professionals versus
“technology influencers”
• Product line diversification?
– Other categories with complex purchasing decisions,
e.g., autos, financial services
• Vertical integration?
– Sell Snap! to NBC?
• Business model “hybridization”?
– Now: content provider, vertical portal, and online broker
– Become an online retailer?
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“We have not succumbed to the frenzy of doing a bunch of
$40 million deals with search engines and trying to acquire
customers at any cost … say it’s going to be 15% of the
market in 5 or 6 years – do we literally tank the company to
go out and build share in that business?”
DiRomualdo, Borders’ CEO, 9/21/98, Forbes
• % change in stock price, Apr. 97 - Apr. 01
– Barnes and Noble: +27%
– Borders: -21%
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“I think of them [dot-coms] as fireflies before the storm –
all stirred up, throwing off sparks. Maybe one or two of
them will be profitable. The storm that's arriving – the real
disturbance in the force – is when the thousands and
thousands of institutions that exist today seize the power of
this global computing and communications infrastructure
and use it to transform themselves. That's the real
revolution. Amazon.com is a very interesting retail
concept, but wait till you see what Wal-Mart is gearing up
to do.”
Lou Gerstner, CEO of IBM, 5/99
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“If you are an existing business, probably the best thing you
can do is have a fire and start over again.”
Robert Levitan,
co-founder iVillage and Flooz
CNET News.com, 10/8/99
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Incumbent Retailers’ Advantages
• Shop online, buy at store (and vice versa)
• Base for delivery (to store or home); base for returns
• Brand reputation and existing customer relationships,
data on customer preferences
• Promotion avenues: coupons, signage, kiosks
• Economies of scale: purchasing, advertising,
• For catalog retailers: leverage existing fulfillment and
customer service operations
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Why are incumbents often slow to the Web?
•
•
•
•
Fear of cannibalization
Fear of stock price impact
Legacy information systems
Inherently conservative, sometimes dysfunctional,
“bottom up” planning processes
– Process is conservative: capital proposals are funded
when GMs stake their reputations after checking
project’s fit with firm’s established strategy
– Process is slow: requires vertical information exchange
and horizontal coordination
• Defensive rationalization yields cycle of failure
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Issues Facing Incumbents
•
•
•
•
•
•
GBF?
Pursue Existing or New Customers?
Separate or Integrate?
Build or Buy?
Partner with Competitors?
Spin Off Dot Com?
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Dimensions of Structural
Separation/Integration
• Organizational decisions
–
–
–
–
Reporting relationships
Physical location
Staffing
Equity ownership
• Operational decisions
– Market positioning
– Coordination of front- and back-office policies and
activities (e.g., pricing, product selection)
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Separate or Integrated?
Online Value Proposition
Same
New
“The Internet Changes
Everything”
New
Separate Structure
Customer
Segments
Served
E.g., Boston.com
Same
“Just Another Channel”
“A Better Mousetrap”
Integrated Structure
Mix of Separate and
Integrated Elements
E.g., Dell
E.g., Staples.com
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It’s rough out there!
“The bottom line for me is I fail, like, let’s
say six months after I launch the company. I
just absolutely fail. So what’s going to
happen? I’m going to apply to business
school and have an incredible application.”
Joseph Park
Kozmo.com co-founder
Vanity Fair, 12/99
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“The state of the Web today is like 10 milliseconds
after the Big Bang. The laws of physics are in place,
but no-one knows exactly how this universe will
expand. We do know its going to be a big deal for a
long time.”
John Doerr, Kleiner Perkins
Fast Company, Feb. 97
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The Burgess Shale
“This is like the Cambrian explosion 550 million
years ago, when multicelled life first appeared on
the scene. It was the greatest speciation ever seen,
but it was also — which people forget — the
greatest rate of extinction ever seen. We’re going
to see all kinds of ideas tried, and the majority of
them are probably going to fail.”
Jeff Bezos, CEO Amazon.com
(Business Week, 9/13/99)
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Opabinia attacking upside-down Hallucigenia
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