Internet sector summary from briefing.com:
"Analyzing Internet Business Models
In the beginning, all new internet businesses were exciting. The very thought of a worldwide information network was so amazing that nearly all internet businesses were viewed as potentially huge businesses.
If the internet follows other major technology industry patterns, it will have three essential stages:
The infancy, where there are many new entrants, multiple new concepts, and the future is unclear. The consolidation, where it becomes clearer what models are the best, and larger companies begin to acquire smaller companies in an attempt to secure positions and set up barriers to entry. The maturation, where competition becomes more focused on efficiency, distribution, and execution than on new ideas.
The PC hardware industry is well into the maturation stage, and has been for a while. The entire software industry (application and client-server software) is close behind in the maturation process.
So where is the internet industry? Briefing.com believes it is now entering the consolidation phase. In this phase, it starts to become clearer which business models are the best. While we also believe that the internet will start a new infancy stage as video and TV become integrated, the current text-oriented phase has been around long enough to begin to make some deductions.
Internet Business Models
To begin with, we have created categories for internet business models.
Information models: the product is information, delivered electronically, for a fee. Transactional models: whatever the product is, the company receives a payment each and every time a transaction occurs. The product may be sold by someone else. Ordering Systems: the product is a physical item, and delivered to the user. Community models: users pay a fee to be part of an online community. Infrastructure suppliers: includes all companies which sell products that make the internet possible: we have put hardware networking companies, ecommerce software companies, web server software companies in a single category. Advertising: the product or service delivered to the user is incidental to the revenue, which comes from advertising. Incremental models: the internet is used primarily to augment an existing, non-internet business.
The information model is a pure internet company. The product is delivered instantaneously and the complete transaction is completed when the user logs off. This is the purest and most significant new model that the internet has created. Online trading fits into this category, along with subscription sites, including Briefing.com. Internet pornography fits this category, but so do research services for professionals such as doctors, lawyers, or journalists. There are many proprietary information services which used dial-up access (such as Lexis/Nexis) which are now moving to the internet.
Transactional business models have great appeal because it is easy to let your imagination go crazy thinking about the huge number of transactions generated by the internet. Since no one knows how big the internet will ultimately be, almost any projection cannot be described as too small.
The ordering system model is primarily a replacement for telephone operators. Items are ordered over the internet, then shipped to the customer. Most companies doing this successfully are brand new, but many existing catalog companies are now moving to this model. Lands End, for example, is making a major effort to develop its internet sales. Amazon.com is by far the largest company in this category.
Community models: these are internet companies which charge users to be part of some community, whether it is a chat room, or a special interest group.
Suppliers are internet companies who sell equipment to make the internet possible. Netscape was the original internet supplier, but companies like Cisco Systems are also major beneficiaries of the growth of the internet. We include in this category all of the companies that sell software specifically to make web sites possible, and we also include companies that provide services to other internet companies, such as hosting.
The advertising model is one where the value to the user is separated from the revenue to the business. Advertising delivered along with the value, usually information, is what brings money in.
The incremental model is one which funnels users to a separate, perhaps more traditional service. The concept here is that usage of the internet is one way or another cause increased business in a non-internet environment.
Obviously, many companies use combinations of these models, or use some as additional sources of revenue.
Briefing.com Conclusions
What conclusions can be drawn about internet business models, at this stage of the industry?
First of all, it is important to make a distinction between models which are fashionable in the stock market, and models which are actually generating profits. In the beginning of the internet, nearly all models were fashionable. In fact, some models seemed appealing simply because they were new.
But as the internet progresses, it is becoming clearer that the information model and the transactional model are going to ultimately be the greatest new business models created by the internet. Both are interesting because they are extremely leveraged. With the internet's growth unpredictable, leverage is appealing. The more the internet grows, the higher margins a company develops, because of its leveraged nature. In both the information and transactional model, there is essentially no cost-of-goods-sold. Once fixed costs are recovered, every dollar drops directly to the bottom line, at the business' discretion.
The ordering system, which has received a tremendous amount of attention, due to Amazon.com's amazing growth, is not as leveraged as the information or transactional model. The ordering system is essentially a revolution on either the Sales & Marketing or the General and Administrative line of an income statement. It is not a revolution on the gross margin line, which the information and transactional models are. Ultimately, it is an improvement in efficiency, but not an essentially new way of doing business.
The community model is one of the more interesting, because there is little in the non-internet world to compare it to. Many community models, however, have found it hard to generate recurring streams of revenue, in the nature of dues. But EBay, which is both a community and transactional model, has found a way to make the community model feed a transactional model. Ultimately, this may turn out to be the purpose of the community model.
The advertising model is fading. While nearly everyone on the internet uses advertising to supplement other revenues, pure advertising models are almost dead. An internet business plan that relies solely on advertising for revenue is not well received in the venture community now. This is somewhat a surprise, as it proves that the internet is very different from TV, which started as a pure advertising model.
The incremental model doesn't receive much attention any more, although it was quite popular in the early days of the internet. The recent announcement by Time-Warner that they would close their Pathfinder site, one of the first major corporate sites on the internet, is an example.
In a subsequent Stock Brief later this week, we will make a table of these models and categorize which internet companies are using which models." |
