|
    
|
COVER STORY Net Profits: How (finally!) To Make Money On The Net
By Arunava Sinha Damned if you do. Doomed if you don't. Everybody knows that you must do business on the Net. But nobody knows how to make money on the Net. Well, almost nobody. Drawn irresistibly by the digital economy, where 100 million shoppers will spend an estimated $15 billion in 1999, a host of entrepreneurs around the world have planted their start-ups in the marketspace, capitalising on the fact that it only needs a computer and a phone-line to get going. So have corporates with deep roots in the physical marketplace, whose entry has been sparked off more by the fear of missing out on an opportunity than by the profit motive. Most of them have proved that the e-conomics of e-commerce isn't easy to master. Most, but not all, for, a small, but select, set of Net-millionaires are demonstrating that the Net can, indeed, be a theatre for profitable business.
Theirs are the business models that India's e-ntrepreneurs can hope to make money with. Having examined the width and the depth of business activities on the Net, BT synthesises the 3 models of virtual profit-making, and follows up the examination with the first-ever survey of India Inc.'s e-commerce strategies by KPMG, the management consultancy company(See e-Valuating India Inc.). The Customer REVENUES Model Free is a 4-letter word. In any market with no entry-barriers--the Net is the biggest of them--the continuous influx of competition will, automatically, drive down prices. Add to that the unique economics of Net-based products and services, where the incremental cost of creating additional units is zero, and prices also tend to gravitate towards the zero-mark. And yet, the paying customer as a means of revenues--and profits--in the marketspace is by no means extinct. The secret? Offer the on- line shopper one, or both, of the 2 value propositions that are difficult to match in the steel-and-glass marketplace.
First, successful e-retailers--whether their product is a paperback or an on-line report, a CD or a snatch of downloadable music, a bouquet delivered to a mailbox or an e-greeting card zapped to an e-mail address--offer shoppers enormous choice, far transcending the level that a physical store can offer. Not having to carry actual inventory, a digital retailer does not have to limit its product offerings to a finite number. Amazon.com, which, justifiably, calls itself the world's largest bookstore, has 4.70 million books on sale. And it is this dimension that makes it more attractive than the biggest brick-and-mortar bookstore. Such breadth of choice is not merely a source of psychological satisfaction to the shopper--it also ensures the best possible deal on a product. For instance, at Travel Online (www.travel.com), a virtual travel mall featuring the store-fronts of more than 500 airlines, the width of choice is translated into a comparison of the prices, timings, and other features of all flights between any 2 points in the world--a menu that they may not have had access to if they weren't shopping on the Net. The second critical source of value that e-retailers can deliver to their customers is customisation. Because the shopping process in the marketspace is an interactive one, product offerings that comprise different modules can be sold in a customised format through the Net. The pioneering example, of course, is Dell Computers: buyers log onto its Website, pick the precise configuration of the different components they want--with an on-line display of the cumulative price--and order their made-for-one PC. The company then assembles the computer according to the desired specs, and ships it to the buyer. Likewise, at the on-line music store CDNow (www.cdnow.com), shoppers can customise CDs, picking their own sequence of songs--without having to limit themselves to one musician--getting a CD pressed according to this choice, and having it mailed to them. Apparel-maker Levi Strauss offers the same facilities--at, obviously, a premium--to jeans-buyers at its on-line store (www.levis.com). Competing as they do with similar offerings in the real-world market, on-line service-sellers are using such interactivity-led customisation as a major USP. Bizes-on-the-Net for banking and financial services in the marketspace--the Union Bank of Switzerland (www.ubs.ch) or Intuit (www.intuit.com), for instance--have set up their Websites in a way that enables every user to receive personalised answers and customised information--all of it at high speed and, most important, at an hour of the day or night that the customer, and not the bank, picks. Naturally, service like this can be offered at a price. These 2 sources of value-addition are uniformly available to all profit-seekers in the e-retail segment of biz-on-the-Net, no matter which of the 2 sub-segments they belong to: stores that sell products which can be ordered on-line, but have to be delivered through physical channels--such as cars, groceries, or furniture. Or stores whose products can be piped through the Net itself--such as software, music, or information.
The paying customer on the Net comes from another source too: companies and customers who do business on the Net. One of the most lucrative source of profits in the marketspace is the ISP (Internet Service-Provider) business. With the customer-base growing exponentially, the market for ISPs, who charge people to give them access to the Net, is constantly expanding. Pioneers like America Online in the US or Videsh Sanchar Nigam in India have already been able to cream the market. Simultaneously, with the number of e-nterprises also shooting up at warp speed, creating and selling the hardware and software that keeps those businesses going is profitable too. From Website-hosting to Webpage design and maintenance, from selling Web-servers to writing the programs used to run e-commerce applications, from creating Web-browsers and other plug-in technologies to crafting Internet and intranet strategies, there is an enormous range of services for which bizes-on-the-Net are eager customers. Here too, sales and profits are waiting to be plucked. The Economics Purely Net-based retailers--whether of products or of services--carry no inventories of their own. However, they have to compensate for that with top-class logistics since the product ordered through the Net has to be picked up from the manufacturer's warehouse and delivered to the customer--who could be anywhere in the world. Naturally, this will considerably, increase the costs of operations. On the revenues side, retailers of the products that are sold in the physical world will not be pressured by the movement towards zero-prices for Net-based products, but sellers of digitised products will have to resist the move. Both, however, will have to attain enormous volumes of business to ensure that their high fixed costs are recouped. That is why, despite the potential, actually making profits through e-retailing remains difficult--a fact exemplified by, inter alia, the loss of $124.50 million, on sales of $610 million, run up by Amazon.com in 1998--though by no means impossible. Says Donald St Clair, 54, Vice-President, A.T. Kearney: "Inventory-management is the competence requirement of the day. " The Benchmark The best Net-retailing strategy aims to provide not just a great shopping experience, but also leverages the process to offer additional value to the customer. The on-line toy-store E-Toys (www. etoyscom) reminds its customers of the occasions on which they should be sending gifts to friends and family-members, and offers to have the present--bought, obviously, from its e-store--gift-wrapped and delivered. Pleased at a social obligation being fulfilled, the customer is happy to use its services, ensuring an edge over real-world rivals for the digital shop. The advertiser REVENUES Model Captive eyeballs are the most prized commodity to the advertiser trying to communicate with Netizens. Serve them up, and a flow of revenues is assured. After all, no marketer of consumer--or even industrial--products can afford any longer to ignore the universe of 100 million potential customers, growing to 140 million by the end of 1999, that the marketspace represents. So, these corporations have no choice but to advertise on the Net--and, just as in the real-world market, they are picking out ute media that offers them the largest number of members of their target universe at the lowest-possible cost.
Several genres of such media have emerged: the portal--Yahoo!, MSN, Lycos, or Excite are classic examples--in its most generalised form acts as an entry-point to the vast reaches of the Net for surfers, offering them links to the subject of their choice. A more specialised version, the so-called affinity portal, acts as a broad window to a narrow theme--such as espn Sportzone to sports, or C-Net to technology. And, in its most focused form, the portal is devoted to specific events--the Academy Awards, for instance. The attempt in all these cases is to offer the advertiser a unique platform for Web-commercials: the starting point of surfing for millions of consumers. In the same category as the portal--indeed, the dividing-line is often blurred--are search engines, with AltaVista and Hotbot being the classic examples. A second genre of biz-on-the-Net that is homing in on advertiser revenues comprises digital gathering-points for specific communities. The objective here is to synthesise a society of potential customers, no matter where they live in the physical world, who are sufficiently united by their common interest in a particular subject, or theme, to spend many on-line hours at the community site created for them. Obviously, their continued presence, coupled with their defining characteristic of being interested in that subject, makes them a sharply-defined customer group that a biz-on-the-Net can offer advertisers. This is the moving principle of Geocities (www.geocities.com), which consists of hundreds of distinctive virtual communes, dedicated to subjects ranging from automobiles to zoos. And Geocities is cleverly directing advertisers targeting those particular communities to the sites where the members congregate. Its profit-making potential is evident from the price of $4.50 billion that Yahoo! paid to acquire it. The third category of ad revenue-seekers comprises those biz-on-the-Net outfits that are developing technologies for use by surfers while they are on-line. A classic example is the on-line chat software created and distributed, free of cost, by Xoom (www.xoom.com). It enables anyone to set up a chatroom on her Website--and anyone who enters the room has to download an applet that creates both a chatting window and an advertising space. So long as the surfer uses the applet, she is captive to the advertising that flashes upon it--a facility that Xoom leverages for better rates from advertisers.
The final frontier--which keeps being pushed back--of the advertising revenue-driven biz-on-the-Net model is marked by pure traffic-attracting innovations. The attempts of these sites is to bring in surfers through sheer novelty, using a mechanism of rewards for referrals. The most ubiquitous of these is the on-line sweepstake--exemplified at sites like www.lunch 4free.com. The strategy driving this form of biz-on-the-Net: use any means, the more novel the better, to get surfers onto your site. The Economics Since operations are limited to the marketspace--with no physical delivery of products being involved--the costs of this biz-on-the-Net model are concentrated in 2 areas. The first is the infrastructure: given the mass of the traffic that the portals, for instance, hope to attract--the average monthly population of Yahoo! is 30 million--prodigiously powerful servers to host the sites, and massive bandwidths of connectivity for e-customers to log on without facing logjams are essential. Both require large chunks of capital. The second--and, perhaps, the larger--cost is that of building the intellectual assets involved: the software that drives the search engines, the designing skills that go into constant freshening and upgradation of the Websites, and the technological innovation that ensures the invention of newer services. A third cost, of course, is that of acquisition: after all, many bizes-on-the-Net are expanding through M&A, paying amounts as high as $6.30 billion--Lycos' bill for buying Excite--which is, essentially, the price of buying the customer-base and the future revenue-streams associated with it. And biz-on-the-Net sites that can carve a clear segment out of the ever-bigger repository of customers that the Net is becoming can expect to rake in advertising revenues that will only keep rising. After all, Web-advertising revenues--including, crucially, those from ads for Net-businesses--are doubling every 100 days, expanding the pie, and promising hot returns to those who get their strategy and their customer focus right. The caveat? Says Felix Tan Jia Kien, 36, the Regional Marketing Director of the e-commerce solutions-provider, Silkroute Interactive: "The entry-barriers are so low that you have to build an unassailable lead very rapidly." The Benchmark The biggest opportunity for an advertising-driven biz-on-the-Net lies in attracting large numbers of surfers--and then segmenting them in a way that appeals to advertisers. That's the model followed by Yahoo!. While its opening page is undifferentiated, the rest of its contents is arranged either thematically or in terms of regional interests. Thus, advertisers at these sub-sites are assured of being exposed only to their targeted audience segment. And Yahoo!, of greater business from these advertisers. The Commission REVENUES Model In the jungle, the guide draws top dollar. In the information explosion on the Net, the biz-on-the-Net that enables the shopper to find the seller is marketing a service that adds unmatched value to the customer. Imagine the plight of the on-line buyer who wants to, say, find the lowest-cost apartment in a specific neighbourhood. Just where does she even begin her search? And, most important, how does she know there isn't a better deal somewhere else on the Net? By plugging this crucial gap, the info-intermediaries are meeting a vital need. Their business offering is, essentially, an automated search service that trawls the entire Web to find the best matches to the needs of the buyer.
And, like the classic broker in the real-life market, they can charge either--or both--the buyer and seller a part of the price for their service. While the seller rewards the e-ntrepreneur for routing a sale his way, and away from competitors, the buyer parts with a portion of her savings. Thus, every associate site of Amazon.com, for instance, earns a part of the purchases made by shoppers who arrive at the digital bookstore from its pages. In its most generic form, the info-intermediation e-business is taking the form of search engines and portals. Besides the advertising revenues they get these Net businesses make money by charging other biz-on-the-Net sites a fee, or a commission, for referring buyers to them. For instance, Dealtime's (www.dealtime.com) Net-product is a BOT--Netspeak for robotised search engines--that helps shoppers locate stores offering the largest discounts in a specified physical market at any given point of time. It earns its revenues from the referrals. At the other end of the info-intermediation continuum lie e-auctioneers like EBay (www.ebay.com). Here, buyers can shop for products ranging from antiques to personal technology gadgets, bidding against one another, with the site bringing together buyers and sellers for deal-making and charging a commission of the sale proceeds. The Economics Sure, like every other biz-on-the-Net, intermediaries can expect to charge revenues--and earn profits--for their service only so long as a competitor doesn't offer the same benefits free. But precisely because the service holds out the possibility of generating savings for the buyer and added sales for the seller, neither will object to paying for the benefit. Thus, revenue streams are likely to flow, making the model profits-oriented. Besides the fixed costs of maintaining an easily-accessible Website, the costs are primarily those of developing the technology that makes the searches faster, more accurate, and capable of accommodating more ambiguity in the specifications. Investments in these areas need to be continuous since the ever-growing mass of the Net needs increasing power behind the search technology. Declares Eric Schmidt, 52, CEO, Novell: "Your long-term revenue prospects really depend on the technology you possess and how you use it." The Benchmark Ever since the US natural gas industry was deregulated, prices have been fluctuating considerably. For industrial customers, buying gas at the lowest-possible price has, thus, become a major input in controlling costs. Enter Energy Marketplace (www.energymarketplace.com), the Net-business run by the Southern California Gas Co.. Buyers use the site to make bids, stating their quantity and their price, which producers scan, and then close mutually-acceptable deals. For its crucial role in bringing together the buyer and the seller at constantly-accessible platform, Energy Marketplace earns fees from the latter. Don't underestimate the difficulty of making profits in the
marketspace. Warns Patrick Meehan, 37, Research Director (Electronic Workplace), The
Gartner Group: "Prepare to shed blood for the next three years." After all, the
biz-on-the-Net competes not just with digital rivals, but also with the physical
marketplace, which has the sheer weight of habit on its side. For every on-line buyer who
uses the mouse to shop, there are over 6,000 who walk, ride, or drive to a
brick-and-mortar store. Ultimately, therefore, the only fount of growing gains on the Net
is the customer who has been persuaded to shun not just your other e-rivals, but also
real-world competitors. Which is why the pursuit of profits, even in the marketspace, can
be made from a business model that delivers--by the standards of the physical
marketplace--real value. Virtually.
|
|
 |
 |
There's bound to be
money in the marketspace. But you must have the right revenue stream and the right
business model for the Net. BT identifies the strategies, benchmarks, and competitive
advantages needed to create the profit-making biz-on-the-Net. 
It
hasn't become diffused. On the contrary, Rediff On The Net (www.rediff.com)--set up in
December, 1995, by the adshop Rediffusion-Dentsu Young & Rubicam--is now the country's
largest all-service biz-on-the-Net. From retailing books, music, and travel facilities to
serving as a news and media content-provider, from offering free e-mail and homepages to
selling on-line tutorials--including real-time grading--for students, Rediff On The Net is
rapidly progressing towards becoming the starting-point on the Net for all surfers
interested in India. Its revenue strategy is twofold: picking margins from on-line sales,
and collecting advertising from companies eager to reach its 1 million-and-odd visitors.
Says Ajit Balakrishnan, 49, CEO, Rediff On The Net: "Our goal at the moment is to
grow marketshare and cultivate satisfied customers." Once it builds critical mass,
though, Rediff On The Net will prove to be a diffused portal to profits too. 
Atul Gupta wants his footprints
all over India Inc.'s Websites. For, they're the customers of his Web-solutions start-up,
Pugmarks Interweb (www.pugmarks. com). The 34-year-old CEO of the start-up began the
business back in May, 1996, and now offers a complete package of services, from
domain-name registration to e-commerce. In the process, it's growing furiously, with
revenues for 1998-99 slated to touch Rs 1.50 crore, thrice as much as the level of
1997-98. "We're among the 1 per cent of Web-solution-providers in the country who are
making profits," claims Gupta. His strategy for growing faster than the market?
Consistent advertising. But, importantly, Pugmarks is also changing its delivery system to
keep pace with growth. For instance, instead of offering only customised on-site
solutions, it has now created a packaged solution for Website-hosting that can be
downloaded from the Net. This e-biz will sure leave its mark. 