I think I found a link to the Sm@rtReseller Article:
zdnet.com
Feb 28, 2000 Issue
Join The Giants
Meet Sumo Jr.
By Steven J. Vaughan-Nichols, Sm@rt Reseller
Ever hear of a "keiretsu"? If you haven't, you will. The idea of aligning a number of businesses under one umbrella helped propel Japan to economic heights.
Mention the term "keiretsu" to someone at your company, and he's likely to rifle through the menu that came with last week's sushi dinner. But several aggressive e-integrators and ISPs?well aware that keiretsu doesn't come with rice and a set of chopsticks?are doing business on the cusp of what could be the Internet's next big economic model. And the financial results are already noticeable. Keiretsu is an old Japanese business concept that contributed to the country's incredible economic power in the 1970s and '80s. Essentially, a keiretsu is a family of closely-knit, complementary companies. Although the individual business names remain different, these corporations?usually under the baton of a leading bank (or, today, venture capitalist)?act in many ways as one powerful company that can body slam the competition.
This model ruled Japan's businesses for decades, because its members cut each other sweetheart deals, and, as a result, reduced competition, presented potential enemies with a united front, and cut costs. On the consumer front, keiretsus lured customers not just to a single product or brand, but also to a whole family of companies that offer multiple products and services.
Sound familiar? It should. We're already well on our way to seeing the emergence of at least seven Internet keiretsus (see "The Seven Sumos," at right).
"The keiretsu model is alive and well on the Internet," affirms Yankee Group chairman Howard Anderson.
Indeed, through acquisitions, investments and strategic partnerships, sumos like America Online, AT&T and CMGI are amassing Internet gravitational pull, sucking into their orbit everything from Internet bandwidth, to software technology, to comprehensive e-business services.
As these online giants increasingly display keiretsu characteristics?like encouraging deep partnerships between satellite companies?the ramifications for channel players is becoming quite clear. Internet integrators, app hosters and ISPs able to ink deals with the emerging Net keiretsus are raking in handfuls of new customers that they otherwise never would have seen.
"Channel players are the critical element for some of these companies," says Anderson. And if you get in, the keiretsu "family members will definitely make you rich," he says.
The key question for many channel players: How do you crack the club-like environs of the keiretsu set? And once you're in, how close do you get?
The emergence of the Internet's keiretsu culture is no accident.
Its seeds can be traced to a handful of venture-capital (VC) outfits that have been striving for years to create empires of synergistic high-tech businesses. Most, like Silicon Valley VC Kleiner Perkins Caufield & Byers (KPCB), are very forthright with their intentions, with KPCB openly describing its investments on its Web site as its "keiretsu companies."
Following in the footsteps of the VCs, a handful of powerful technology and media companies, like Microsoft and America Online, also are approaching keiretsu status?eager to cross-leverage their menu of Internet access, content, software and services.
The benefit is undeniable. Keiretsu members get immediate access to a host of other business partners, technologies and customers. Officials at investment company Internet Capital Group (ICG), for instance, estimate that there are currently 48 active partnerships at work among its 50 high-tech investments.
While ICG officials are reluctant to utilize the term "keiretsu," they proudly discuss the interconnection among their businesses. The corporate holding company, for example, hosts an electronic mailing list for its entire network of businesses, where people can shoot off questions or bounce around ideas. In addition, ICG holds quarterly conferences for top technology execs from its member companies.
"The guy from US Interactive left the last [conference] with six qualified leads," says Rick Bunker, managing director and CTO of ICG, which owns a stake in other channel players, including Breakaway Solutions and Context Integration. "That benefits us in three ways: It helps US Interactive, it helps the companies [that US Interactive partners with] and it helps us."
Such encouragement often blossoms into ripe collaboration. For example, ICG bought a 33 percent stake in ComputerJobs.com in 1998. Today, the high-tech job placement site lets other ICG members advertise job openings at a discount rate.
Dozens Of Customers
The synergies for Internet consultants burrow even deeper. "When you hire a consultant, they build something for you, [but] they walk away with something, too," says Bunker. "By working extensively with [companies like] Breakaway, that knowledge stays within your network and is reapplied to your other investments."
It's not such a bad deal for companies like Breakaway, either. Just one year after selling 53 percent of its business to ICG, the application service provider (ASP) has seen dozens of new customers come from within the ICG network and other ICG referrals.
"When we bring a new [company] into existence, Breakaway is brought in from the start," says Bunker. "Before [the start-up] hires [its] first technical employee, Breakaway is in there building the infrastructure ... acting as the company's CIO."
Officials at the budding ASP say the business generated by ICG is only one advantage. The other upshot: credibility gleaned from ICG's clout. "To have them as a strategic investor is incredibly important to us," confirms Breakaway VP Dev Ittycheria.
Such consultant-keiretsu synergies can occur even without a monetary bond.
Just ask Proxicom. Some six years ago, the Reston, Va.-based Internet-services upstart signed a deal to develop online content for budding giant America Online. What started out as a short-term deal grew into an ongoing relationship, including the placement of an AOL exec on Proxicom's board.
When AOL bought Netscape Communications in late 1998 and split the company's software arm with Sun Microsystems, Proxicom took steps to beef up its Sun-Net scape technology practice. Today, the Internet integrator has a dedicated alliance manager for the AOL, Netscape and Sun relationships.
So, when AOL began fielding requests from corporate partners and customers in early 1999 for high-end e-commerce services, it immediately thought of Proxicom. By the middle of last year, it was heralding Proxicom as its preferred e-business service provider.
Sound like hot air? Not so, says a very enthusiastic Proxicom. "We've been seeing one or two deals per year from AOL. ... But when they come in, they're big," says Proxicom's director of alliances Mariette Wharton, who says the average AOL-referred deal is worth about $10 million. "These are customers we normally wouldn't have access to."
Members Only
Such success stories may have channel players wary of being left out in the cold. After all, once keiretsus establish a comfortable portfolio of channel partnerships, cracking the clique-like atmosphere can be as tough as getting into first class with a coach ticket.
While channel players should obviously consider any investment or partnering op portunities with these emerging Internet powers, don't sell the farm outright. Weigh the options. What are they promising? Are there potential synergies? How much will you have to surrender?
And if your cell phone just isn't ringing, think again. Could your specific market really be enhanced by the interconnected relationships of a keiretsu?
For many local and regional players, the answer they often come up with to that question is "no." Indeed, rural areas and small cities are still regularly neglected by the major Internet sluggers?making partnering a less-pressing issue.
Brian Burgmeier, president of Tempe, Ariz.-based ISP Net-World, is adamant that small is beautiful. "No business can be all things to all people. It's all about finding a niche and filling it," he says. "As a small ISP, we take the time to get to know each of our members personally. This helps us create a community that is difficult for the larger players to duplicate."
Indeed, personal service has never been a forte of mammoth providers. But wouldn't some keiretsu perks, like a few blue-chip customers, discounted bandwidth or some cheap head-hunting services, help companies of any stripe or color?
That's the question that nagged executives at $120 million integrator Central Design Systems.
Although a few pots of gold shy of a financial powerhouse, Central Design saw the benefits of deep partnerships and cross-leveraged services early on. To facilitate that strategy, execs spun off a venture-capital arm, dubbed Central Ventures. Executive VP Eric Hughes says they're creating a business model that is the spitting image of the big VCs. "What we're doing is the exact same concept as the CMGIs and ICGs, but on a much smaller scale," he says.
For instance, Hughes recently received a call from Central Design's law firm, Crosby, Heafey, Roach & May, which expressed a keen interest in the integrator's venture arm. The prestigious law firm agreed to offer its legal services to Central Ventures' dot-com start-ups for a piece of the equity action.
A few weeks after both sides shook hands, officials from ImageLock paid a visit to Crosby's law offices. The start-up, which provides image-protection services on the Internet, was shopping for legal services. But, coincidentally, it also mentioned that it was looking for a full range of Internet services.
The law firm quickly ushered the aspiring entrepreneurs over to Central Ventures, where ImageLock snagged some financial backing and a handful of incubation services. "We wound up with a whole new realm of deal flow," says Hughes.
Internet Black Holes
But for all the advantages a keiretsu presents, channel players must proceed with caution. After all, any integrator or ASP that is viewed as overly partial to a particular vendor can lose clout with its customers.
While a player like Proxicom takes great pains to emphasize that it is vendor-agnostic?despite its ties to AOL, Netscape and Sun?other integrators, like CMGI Solutions, may have a harder time selling that story. CMGI officials could not be reached for an interview.
Meanwhile, another critical demand by a keiretsu often is a board seat on the satellite company. The obvious question: Will that exec have your interests, or the keiretsu's interests, at heart?
According to one former Microsoft Certified Solution Provider, "Allowing Microsoft, or a keiretsu, to get someone on your board of directors is like letting a fox into the chicken coop."
Squawk if you must. But first make sure the fox hasn't come bearing a boatload of customers.
So, who are the leading Internet keiretsus?
America Online In the afterglow of the Time-Warner deal, when you think of America Online, you think blockbuster. AOL tends to buy companies, such as Netscape, that will further its overall reach. With Time-Warner, that means content.
Few people realize that AOL is partnering with a host of other companies to further its reach. On the software side, AOL has teamed up with Sun in a joint venture, iPlanet, to produce Web servers and Internet billing services. To deliver high-speed throughput to customers, AOL has partnered with Bell-Atlantic for below-market DSL prices. There also have been rumblings that AOL and AT&T are exploring a relationship to share each other's cable infrastructure. Talk about incestuous.
AT&T Despite the telco's confusing and sometimes slow-moving Internet strategy, the company holds a powerful hand when it comes to high-speed bandwidth.
AT&T also is chasing the DSL market through its involvement in the Internet Alliance?an ISP-service wholesaler. In addition, Ma Bell earlier this year rolled out an ASP "ecosystem" initiative. AT&T provides the data centers and low-level services, and partners bring high-end applications to the table.
The telco giant also is partnering with IBM to offer a joint-certified Internet business package.
For Ma Bell, another deal means it's just another day.
CMGI CMGI is building its keiretsu status the old-fashioned way?with money. This venture-capital firm started out like so many others?launching Internet companies and moving them toward an IPO, before cashing out. The plan has changed.
The key now has become to retain control of the companies, even after public buy-in. After all, what good is a company that can't be leveraged to benefit other member firms? CMGI currently wields major power in online service companies like AltaVista, Critical Path, Engage Technologies, Lycos, MotherNature.com, NaviSite and Raging Bull.
Other recent examples: CMGI in January launched the $1 billion @Ventures Technology Fund, which is geared toward business-to-business e-commerce. Shortly thereafter, CMGI bought a 5 percent stake in fellow VC, Divine InterVentures. Most recently, CMGI beefed up its channel ties by announcing a $920 million acquisition of Tallan, a New England Internet-services firm. Fitting the keiretsu's investment profile, Tallan filed for an IPO on Feb. 1.
Divine InterVentures Focused on the hot business-to-business market, Divine InterVentures boss Flip Filipowski rules this keiretsu with an iron fist.
Indeed, beneath the sheets, Divine members are guided heavily by the keiretsu's overall needs and goals. In Filipowski's vision, each company must raise capital separately and be valued individually. But, like CMGI, Divine seeks to retain control in its investments, adding power to the overall network. Among the key players answering to Filipowski: Andromedia, iGive, Liquid Audio, StarMedia, Whittman-Hart and YesMail.
Microsoft Must we point it out? Microsoft is attempting to conquer the Net the same way it did the PC industry?by setting proprietary standards, undercutting competitors and launching massive marketing campaigns.
Still, MSN has been a disappointment, and Apache is trashing Internet Information Server on the Web. But Microsoft's portal sites trail only AOL and Yahoo in traffic. Microsoft is making inroads with Web services like Expedia, an online travel destination; TransPoint, an online billing endeavor; and now an auto-buying partnership with Ford.
Softbank/Yahoo With an arsenal that includes Yahoo and E-Trade, Softbank is an Internet force to be reckoned with.
What many miss, however, is that Softbank is playing the money game almost as well as CMGI. Hotbank, a Softbank venture arm, boasts a war chest of $900 million. And it already holds powerful positions in well-known Internet players like Launch Media, TheStreet.com and USWeb/CKS.
Vulcan Ventures Paul Allen's Vulcan Ventures has quietly put its thumb in multiple pies. On the brassy public side, you see Vulcan making purchases like ZDTV, a cable TV network for geeks. More discreetly, Vulcan is buying into Internet endeavors like E-Steel, GoTo.com, Go2Net and Mercata.
Allen also has been quickly piecing together the outline of a broadband powerhouse. The parts include Charter Communications and High Speed Access. And a deal with Craig McCaw's Eagle River could be in the works.
Don't think keiretsus are important? We'll let this Media Metrix chart of the top 20 Web properties in the U.S. for December '99 talk for us. Rank Site(s) Keiretsu
1 AOL Network AOL
2 Yahoo Softbank/Yahoo
3 Microsoft Microsoft
4 Lycos CMGI
5 Excite@Home AT&T
6 Go Network Disney
7 Amazon Independent
8 NBC Internet Microsoft
9 About.com Independent
10 Time-Warner AOL
11 Real.com Independent
12 AltaVista CMGI
13 Go2Net Network Vulcan Ventures
14 eBay Independent
15 CNet Vulcan Ventures
16 ZDNet* Softbank/Yahoo
17 LookSmart Independent
18 Juno Independent
19 GoTo.com Vulcan Ventures
20 InfoSpace Microsoft
*Sm@rt Reseller's parent, ZD Publishing, has a content relationship with ZDNet.
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