James,
Notice not one mention of AMZN in this report????
"Donaldson, Lufkin & Jenrette
Jamie Kiggen (jkiggen@dlj.com) 212.892.8985
Tim Albright (talbright@dlj.com) 212.892.6801
Hilary Frisch (hfrisch@dlj.com) 212.892.4374
Cathy Watters (cwatters@dlj.com) 212.892.4357
Sender: jkiggen@dlj.com
The Internet Observer, 03.22.99
DLJ Internet Research
Instruments Of Trade
Origination in the realm of commerce is a difficult thing to trace. The
nature of markets is such that information and ideas, often anonymously
declared, flow freely across corporate borders, eventually coalescing into
opportunities with no claim of ownership possible. It's within this context
that separate enterprises, attuned to those markets and those ideas, at
times arrive at the same conclusion as their competitors about a given
opportunity, and follow a similar plan of action. This is known as the
paradox of calculated coincidence (which, coincidentally, we just made up).
And it's as good an explanation as any for what's unfolding these days on
the stage of Internet commerce.
The three major tent-pole companies of the Internet, AOL, Yahoo!, and
Microsoft have all recently pitched camp in the middle of what could wind up
being a big intersection, the nexus between consumer online purchasing and
business commerce activity. Each of these companies wants to be the
marketplace where consumers and businesses meet, and they also want to make
money by providing a technology platform for businesses aspiring to do
e-commerce. And the current belief is that success in one feeds success in
the other, in another example of the virtuous cycle that drives increasing
returns for big Internet companies: eyeballs beget commerce opportunities
beget eyeballs. The new bet is that providing the commerce plumbing will be
as lucrative as the commerce itself, or will at least be strategically
essential.
We've all heard the Carl Sagan-like numbers rocketing around the Internet
universe that attempt to quantify the e-commerce opportunity. Of the total
$1.5 trillion in Internet commerce revenue estimated for the year 2002, $1.3
trillion is projected to be business-to-business transactions, $150 billion
in consumer purchases, $15 billion in advertising and marketing spending,
and $35 billion in broadly-defined software spending. Microsoft, AOL and
Yahoo! each approach this combined opportunity from different but still
advantaged positions: Microsoft's software is pervasive and getting more so,
AOL is the principal escort for consumers onto the Internet, and Yahoo! is
where those consumers often turn for guidance once they're on the Web. But
can any of these players provide the type of turnkey platform/consumer combo
that they perceive the market is, or will be, demanding?
The latest company to volunteer for this difficult job is Microsoft. At the
company's E-Commerce Day in San Francisco a few weeks ago, Bill Gates
unveiled a series of initiatives tying Microsoft software, Microsoft
partners and Microsoft Web assets (which include consumers) together into a
comprehensive e-commerce framework. Dubbed BizTalk, the framework will be
delivered on Windows NT 2000 in combination with the SQL Server database and
an upgraded Site Server product, and the various components will roll out in
stages over the next year (with of course the NT 2000 component being the
most anticipated).
While the technology is critical, it's more important to understand BizTalk
as an open language or publishing format (built around the increasingly
accepted standard known as Extensible Markup Language, or XML) that allows
enterprises to communicate with each other and with consumers. In effect, it
permits the transmission and publication of documents or information to the
broadest possible audience, regardless (theoretically) of the software
applications or computer hardware being used by either party. And since
efficiently exchanging information is the most fundamental aspect of the
online marketplace, Microsoft hopes to be perceived as the enabler of all
sorts of fluid and happy commerce.
On the product side, it's no secret that Microsoft is the default selection
for the majority of MIS shops out there (even Dataquest has figured this
out: according to their surveys, Microsoft's Commerce Server holds a 63%
share on a revenue basis, and the NT platform hosts 42% of the top 100
shopping sites). One way Microsoft has achieved this sort of favored nation
(or, more precisely, favored hemisphere) status is by making a compelling
case to buyers around a lowest total-cost-of-ownership equation. Now, their
new e-commerce initiative takes that value proposition a big step further.
Not only does Microsoft want to provide you, Mr. or Ms. Enterprise, with the
most cost effective technology out there, they want to throw in millions of
customers along with all that high-margin software. In other words, if it
works, BizTalk buyers can factor into their technology purchase decisions a
very low cost to acquire new customers for their blossoming e-commerce
initiatives.
This is where the critical commerce service of promotion comes in. The key
to achieving Microsoft's stated goal of capturing one million BizTalk
commerce solution customers is giving them a compelling reason to build an
e-commerce site. MSN and the Microsoft portfolio of Internet commerce assets
ostensibly fill this role. Microsoft's MSN, which reaches about the same
number of users as Yahoo! (we won't debate the relative quality of those
audiences here), provides the gateway. With the LinkExchange network,
composed of over 450,000 small business sites with trading links to each
other, Microsoft offers a self-service promotional network where commerce
sites are given the tools to manage their own ad and promotion campaigns. In
addition, Microsoft operates a series of vertical commerce environments like
CarPoint, HomeAdvisor and Expedia in which merchants can place their
products, as well as a horizontal environment like Sidewalk, which
aggregates customers at the local level. There are a bunch of other pieces,
but frankly it's getting late, and you get the idea: Microsoft is
aggregating lots of eyeballs, and most of those eyeballs are (at least
circuitously) attached to wallets.
O.K., now that we've gotten two-thirds of the way through this Observer
without mentioning AOL, we better give a nod to a key element of the
strategy underlying the Netscape acquisition (as we hear the hotline from
Virginia ringing now). We're not eager to start scratching this bite again,
but it's important to note that AOL has beaten Microsoft to the punch when
it comes to articulating a vision of vertically integrated e-commerce
solutions. Its acquisition of Netscape wasn't simply about adding the
NetCenter portal into its stable of consumer brands. Among other potential
assets, AOL got an array of enterprise commerce technologies, permitting a
broadened sales pitch to the growing crowd of businesses hoping to reach the
AOL audience. In other words, right around Thanksgiving, four months before
Microsoft's BizTalk launch, AOL bought a turnkey (solution). Now that the
deal has closed, that solution should start finding its way into the hands
of AOL commerce partners.
The AOL vision anticipates Microsoft's in a number of ways: provide
enterprises with the tools to build commerce vehicles that reach the AOL
audience via a collection of AOL sites, beginning with the core AOL service
and extending to Compuserve, Digital Cities and AOL.com and, eventually (in
part through the ICQ and Netscape Navigator browser user bases) onto a
revamped NetCenter. And lest we think that AOL is only in the business of
serving Fortune 1000 companies, it's aggressively moving down the food
chain, providing small online stores with both hosting and commerce-enabling
tools by striking a three-year, $43 million deal with Verio, a leading
Web-hosting company. Only AOL could strike an arrangement whereby it gets
paid by the service provider as well as by the customers to whom the service
is being provided. We, and AOL, will take deals like this all day long, and
it speaks to how AOL is unsurpassed at extracting value from its massive
audience.
And speaking of audience, Yahoo! is pursuing its own version of an
integrated e-commerce strategy as it directs its fire hose of Internet
traffic onto commerce vendors' sites in tremendous bursts, and so far
they're doing it without acquiring an enterprise software company or
spending billions on R&D. Almost from the beginning, Yahoo! has worked to
allow any customer to sell things on Yahoo! through a variety of outlets.
Yahoo! Classifieds is the leading classifieds site on the Web, and Yahoo!
Auctions is starting to become an active marketplace. In addition, Yahoo!'s
acquisition of ViaWeb last year provided it with the tools to enable small
businesses to build storefronts and place them within the Yahoo! Shopping
marketplace.
But the biggest Yahoo! e-commerce move of all (at least to date) is the
pending acquisition of GeoCities and its installed base of over 3 million
homesteaders. These individuals, all of whom have built their own home pages
on GeoCities, comprise a potentially huge grassroots commerce population. In
addition to enriching the content and community experience for all Yahoo!
users, GeoCities offers a means of capturing individual Internet commerce by
providing users with the tools to publish and sell items through its
GeoShops program. Ultimately, we can see a tight connection between
GeoCities and Yahoo! Auctions, and in terms of sheer numbers of commerce
providers, Yahoo! may well be the first of the big three Internet companies
to actually enable a million commerce partners. Look for them soon in a
Yahoo! Shopping area near you.
One of the lessons the Internet has taught us to date is that early leaders,
if they execute, have a great chance to remain the long-term leaders. As
Microsoft, AOL, and Yahoo! help to bring stores online and place those
stores within their online shopping environments, execution gets more
complex, but the customer lock-in could be unassailable. Microsoft's
technology execution and penetration of Fortune 500 MIS shops is at one end
of a spectrum that's anchored at the other end by the critical mass of
grassroots tenants on the Yahoo! Shopping channel. In between stands AOL,
working to leverage the most active online audience anywhere into a huge
base of potential commerce software buyers. Ultimately, the question
remains: can one vendor provide a truly integrated solution built around an
unprecedented combination of state-of-the-art technology and big-walleted
customers, and is this what enterprises really want? A measurable amount of
shareholder value should follow the answer." |
