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Business Models
of the Dot
Com Survivors
Volume 1, Issue 7
May 2001

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Business Models
of the Dot
Com Survivors

The dot coms have been falling fast and furiously. There are a few major players left standing.

Sites like eBay, Yahoo!, AOL and Amazon are still hanging in there. But do these sites really have something to teach us about e-commerce or are they just successful because they got their first?

According to the analysts, it seems to be a little bit of both.

When you think of business on the Internet it is essentially divided into three areas, business to business (B2B), business to consumer (B2C) and consumer to consumer (C2C).

The auction site eBay is a prime example of a site that includes aspects of all three.

It is a microcosm of the Internet itself and has evolved as a fascinating business model for ecommerce.

Everybody is a player on eBay and it is this kind of inclusion that makes the site both profitable and vulnerable.

It has been duped on multiple occasions. One of the latest was on April 18 when the U.S. spy plane, the one that was recently forced down in China, was put up for sale on the site.

According to Edward Mazza of the Tampa, Fla.-based "MJ Morning Show" staffers began the auction at about 8 a.m. ET using the seller name "chingchongwo".

The listing included a photo of the plane and a description in broken English that said all the sensitive information had been removed and the electronics smashed.

The bidding started at 8 a.m. for $1 million and had reached a $100 million by 8 am of the following day. By 10:30 a.m. on the second day, eBay realized the joke and pulled the ad. Mazzar said the real plane, which remains on a runway at a Chinese military facility on Hainan Island, is actually valued at $80 million.

Never before has a business model existed that directly connects buyers to sellers in such a capacity. Although eBay has been duped from time to time, it is this aspect of the site that has turned it into a productive business model.

Penelope Patsuris of Forbes reported in March that Sun Microsystems Chief Executive Scott McNealy experimented with product pricing last year by putting a few workstations up for auction on eBay to see what would happen. Since then, Sun's server sales on eBay have surpassed $10 million.

Microsoft has tried to cash in on eBay's success. In March CNN reported that in exchange for eBay's adoption of Microsoft.NET, the company agreed to integrate eBay's online marketplace into its MSN portal, Carpoint, bCentral and WebTV.

Patsuris reported in April that the proportion of sales done by businesses on eBay has been growing consistently and small businesses now account for about 60 per cent of its revenue.

Sascha Segan of ABCNEWS reported in January that eBay had 18.9 million registered users and had sold more than $5 billion worth of goods in 2000.

Because Ebay's business model covers all aspects of ecommerce, it can only continue to grow.

Both B2B and B2C world sales are projected to hit $6.8 trillion in 2004 according to Forrester Research. North America will represent a majority of this trade but its dominance will fade as some Asian-Pacific and Western European countries grow over the next two years.

CNET's Erich Luening reported in February, that "Overall, analysts estimate the B2B market will grow from about $131 billion in 1999 to between $2.7 trillion and $7.3 trillion by 2004. In comparison, Forrester Research projects that e-tailer spending will reach $184.5 billion in 2004, up from $20.3 billion last year."

The National Association of Purchasing Management and Forrester Research released a report on e-commerce in April. It revealed that 71 per cent of organizations use the Internet for indirect purchases. This is about 9 % of their total purchases. It was also reported that while there were more purchasers online, more than half of those who responded felt that they were still in the earliest stages of adopting online buying.

What these stats indicate is that business will continue to grow online and becoming a part of it means coming up with new business models that grasp the difference between traditional business and ecommerce.

Segan identified the search engine Yahoo! as another successful Internet company. He interviewed Scott Kessler, an Internet analyst with Standard & Poor's who said that both eBay and Yahoo! "have built on their "first-mover advantage" to build their brands and completely dominate their markets."

He reported that Yahoo! and eBay had also kept control of their expenses. He identified Yahoo! as being the nation's top pure Web site with 55 million unique visitors in November 2000. Yahoo!'s business plan focuses on advertising, partnership and commission fees to generate income.

According to George Mannes in the April issue of The Street, Yahoo! reported earnings of 1 cent a share, down from the year-ago 10-cent profit for the quarter ending March 31. Yahoo! CEO Tim Koogle stepped down in early March and Heather Killen, senior vice president of international operations, is expected to leave the company in the middle of June.

Mannes further reported that Yahoo! had plans to lay off about 400 workers as it struggled "to adjust to the collapsing Internet advertising market, which fueled the company's growth last year until dot-com customers finished running through their bank accounts."

Another of the giants is AOL Time Warner. The BBC reported in January "AOL Time Warner will not be entirely insulated from the broad trends that are hitting the Internet sector, such as reduced advertising revenue. But it has many different streams of making cash, including monthly subscription charges of about $20 from more than 24m subscribers - that is above $480m. This stands in stark contrast to Yahoo, which generates almost 90 per cent of its revenue from advertising."

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In August 1999 CNET ran a story on how AOL went "from a digital whipping post to an Internet superpower". Bruce Kasrel, an analyst with Forrester Research was quoted in the article. "AOL did it by just sheer marketing chutzpah and pushing disks down everyone's throat...They had really done a good job making their name synonymous with the Internet to the masses and, as the masses come more and more online, they go to AOL. People get addicted and they stay hooked," he said.

Amazon has been another of the big players but has yet to show a profit. Associated Press reported in April that Amazon reported a 22 percent increase in sales and a narrower than expected loss for the first quarter. The net loss of $234 million, or 66 cents a share, for the first quarter, compared with a net loss of $308 million, or 90 cents a share, in the same period last year.

Associated Press reporter Michael Martinez quoted Jeff Bezos, founder and CEO of Amazon in January. '"Our strategy hasn't changed at all, and it remains as it always was," he said. "This model does work. This is an investment phase in this model and we're full-steam ahead."

That model has produced impressive results, if not an impressive balance sheet. The company boasts a customer base of 16 million people, which gives an asset that few other e-commerce companies can boast - access,"' Martinez wrote.

In a May Active Media research report, "E-Commerce Shakeout: Surviving the Maturing Web" it was found that a core of Web businesses are thriving online. The research showed that 58 per cent of online businesses are already profitable and another 27 per cent were expecting to become profitable in the next year.

The report cited that the greatest challenge for most businesses was to remain fiscally responsible while at the same time being able to finance rapid growth. It further reported that when the dust from the shakeout settles, the Web businesses left standing would form the core models for tomorrow's Web.

On April 18 Forrester Research reported that 88 per cent of US businesses saw the Internet as important to their buying plans and over a quarter said they had saved money by doing business online.

"Think, for a moment, what the pundits were saying just five years ago. Some thought the Internet a fad.... But who would have guessed that consumers would give their credit card numbers online... or participate in an auction, where the only test of a seller's legitimacy is based on the "self-policing" ratings of other bidders?....who could have predicted that an Internet search engine would have a market value of over USD 90 billion before the year 2000? Or that an Internet service provider (the number two or three player at that time) would buy Time Warner? ...The medium is the message now more than ever, and everyone is looking for the right model to cash in.," wrote Bob Tomei and Leslie Warshaw in the February issue of ACNeilsen Consumer Insight Magazine.

Consumer Insight met with Paula Sneed, president of e-Commerce, for Kraft Foods who said, "Before, we sold to demographic or psychographic groups of people. Now, it's to John Jones or Mary Smith as individuals and self-segments or communities of very specific interests and needs. Technology enables us to personalize the message."

"The Web is now an integral part of the average person's daily life," said Allen Weiner, vice president of analytical services, NetRatings. "People are conducting a wide range of their day-to-day activities online, such as banking, tax filing, sending invitations, shopping and corresponding with friends and family."

Nielsen//NetRatings reported that in January Internet use had reached 60 per cent in the US, with more than 169 million people having access from either home or work.

The Statistics Canada Daily reported in March that an estimated 13 million Canadians, or 53 per cent of those aged 15 and over used the Internet in 2000. Twenty seven percent of non-users also expressed an interest in getting online.

According to March figures from Nielsen NetRatings the US leads the world in home Internet use, with more than 98 million people followed by Japan with 15 million home Internet users, Germany at 13 million, the UK at 10 million, and Canada at 9 million.

Ecommerce is also expected to take a dramatic turn with an increase in broadband technology or high-speed Internet access. T.W. Rabbit of reported in October that "In the average American home (without a broadband Internet connection), a resident typically spends 33 percent of his or her "media time" with television, followed by radio at 28 percent; the Internet trails at 11 percent.

But in a home with broadband access, the study finds, a person typically spends 21 percent of her or his "media time" online, close to the 24 percent of the time spent watching television and 21 percent listening to radio."

In April SBC Communications, reported that 96 per cent of Internet users in the US with digital subscriber line (DSL) Internet connections felt that their high-speed Internet access was the most important technology in their home. They valued it more than their remote controls (87 per cent), their VCRs (81 per cent), their cable television (70 per cent), even their garage-door openers (59 per cent). They found users would rather be without their morning coffee, newspapers, radio and cable television before giving up their DSL connections.

Emarketer reported in April that An Organization for Economic Cooperation and Development survey finds that South Korea leads all nations when it comes to high-speed broadband Internet penetration. South Korea has 4.3 million broadband connections, or 10 per every 100 people, far outpacing runners-up like Canada at 4 per 100 people and the US at 3 per 100 people.

Rabbit reported that people with high-speed Internet connections make more online purchases than those without. They also stream media, which is expected to be the basis of online advertising in the future.

All of these aspects of the Internet have to be taken into account when you try to understand ecommerce. There are a few business models we can try to understand but for the most part the only constant we really know about ecommerce is that there is no constant.


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