E-Business Models

An e-business model is simply the approach a company takes to become a profitable business on the Internet. There are many buzzwords that define aspects of electronic business, and there are subgroups as well, such as content providers, auction sites and pure-play Internet retailers in the business-to-consumer space.

Many Internet firms witnessed a meteoric rise in their stock values in the late '90s, only to crash this year. For instance, Drkoop.com Inc. in Austin, Texas, announced its initial public offering at $9 per share in June last year. The price rose to more than $30 per share but has since plummeted to less than $1 per share.

Given the carnage among dot-com stocks this year, what online business models are expected to succeed in the future?

"What we learned was what we knew all along," says Kenneth P. Morse, a senior lecturer and managing director of the MIT Entrepreneurship Center in Cambridge, Mass. "Businesses need to make more money than they spend. The new model is the old model, but technology is essential to maintain a competitive advantage, and cash flow is more important than ever."

Yahoo Inc. in Santa Clara, Calif., operates a successful portal site, providing content and an Internet search engine. However, many portal sites, such as Go.com, MSN.com and AltaVista.com, have fallen on hard times.

The idea behind portals is the same as that behind television advertising: aggregating eyeballs and directing them toward advertisements. But television viewers are passive, and people need to wait through the ads to see the shows they want to watch.

"But the Web doesn't work that way," explains Bill Frezza, a general partner at Adams Capital Management Inc. in Sewickley, Pa. "Content presentation is not serial. Viewers are active, not passive. There are always thousands of places to go. No Web advertisement can match a 15-second TV spot."

When First-to-Market Fails

Many of the failing companies were operating on a first-to-market strategy. Their hope was that by getting their ideas out ahead of the market, consumers would develop brand loyalty before competitors arrived.

Priceline.com Inc. in Norwalk, Conn., is a good example of a company that attempted this strategy, with its name-your-own-price scheme for buying airline tickets and other goods.

But the closing of its Greenwich, Conn.-based WebHouse Group licensee - which applied the same model to groceries and gasoline - combined with increased competition from airlines and other travel sites has led Wall Street to trade Priceline.com's stock down to less than $3 per share, from a high of $104.25 in March.

"First-to-market as a business model has always been risky. You are vulnerable because you have nothing proprietary, need vast funding and rely on rapid deployment," says Carol Brennan, president of Massachusetts Technology Development Corp., a venture capital firm in Boston.

So why did investors and venture capitalists get caught in such speculative and irrational investments?

"Investors felt that they were investing in technology, when they were really investing in retailers and distributors," says Bill Younger, managing director of Palo Alto, Calif.-based Sutter Hill Ventures. "These companies have small profit margins. They couldn't justify their valuations in typical price/earnings ratios. When does it turn profitable? Companies like Amazon.com have yet to answer that."

One segment of the business-to-consumer world that's thriving is niche markets. Scott Galloway, CEO of Internet incubator Brand Farm Inc. in New York, has been responsible for several successful Internet sites that target a niche.

For example, RedEnvelope Gifts Inc., which launched in 1997 as 911gifts.com, began as a last-minute gift site but now markets more than 1,000 items that are unique to the site. Customers seem willing to pay a premium for RedEnvelope-edited selection and enhanced customer service. The company has $30 million in sales, with a 46-point profit margin.

"There needs to be a quick path to profitability," Galloway says. "And the ultimate metric is margin. There are three levers to achieving margin: edited selection, customer service and inspirational branding."

The B2B Way

Roslyn Doktor, a vice president at McConnell International LLC, a global technology policy and management consulting firm in Washington, looks at e-business models another way. "Is the model buyer- or seller-centric? What is the driving force of the business?" she asks.

The greatest strength of the Internet, says Doktor, is its ability to bring together people, governments and businesses and facilitate the flow of information among them. That's one of the main reasons why business models for business-to-business online marketplaces are expected to succeed, she says.

"It's clear that the Internet is a viable platform for B2B trade," says Matthew Sanders, an analyst at Forrester Research Inc. in Cambridge, Mass. According to Forrester, a projected $2.7 trillion in business-to-business transactions will be made online by 2002.

But private marketplaces being formed by industry leaders represent a more successful model, argues Younger.

"These real-time supply chains and e-business design systems are phasing out the more expensive and inflexible [electronic data interchange networks]," he says.

"I think the real surprise has been how hard it is to become profitable," says Jim Brodo, managing director at SMGnet, a Philadelphia firm that offers training in e-business models through computer simulations.

"The cost of branding and the technology is so high and [consumers] still use the catalog," says Brodo. "The Web site is just another channel."

Trombly is a freelance writer in Belchertown, Mass. He can be reached at richard.trombly@the-spa.com.

Copyright © 2000 IDG Communications, Inc.

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