e-Business Models

The material provided in this section is part of the one presented in the course:

“Building an e-business Strategy”Harvard business school PublishingCONSISTwww.consist.com

Intangible Assets

Early "click & order" e-business models relied on intangible assets.

Intangible assets are key to e-business success. How well does your firm safeguard its intangible assets?

What are Intangible Assets?

To understand the concept of "intangible assets," it is important to understand the broader accounting concept:

Assets are economic resources that are controlled by an entity whose value can be objectively measured at the time that it is acquired.

The three key points in this definition are: 1

(1) an asset must be an economic resource.

(2) it must be controlled by an entity; and

(3) it must be objectively measurable at the time it is acquired.

___________________________1 Anthony, R. and Reece, J., Accounting Principles, N.Y.: McGraw-Hill, Irwin

What are Intangible Assets?

Firms have traditionally accounted for four key categories of assets

Current assets are those resources that are held for a short time — usually within a firm's fiscal reporting cycle, which in the U.S. has traditionally been 1 year.

Tangible assets include: property, plant and equipment (often called fixed assets) that are acquired to produce goods and services that generate revenues; and tangible assets that are held for resale (often called inventory).

What are Intangible Assets?

Investment Assets are securities of one company that is owned by another to either control the other company or in anticipation of earning a return from the investment.2

Intangible assets are "non-physical" economic resources that are controlled by a business and provide measurable value. They traditionally have included only those resources that can be objectively measured, for example, goodwill, patents, copyrights etc

__________________________

2 Non-current investment assets are different from marketable securities in which a company invests as part of a cash management program. The latter are classified as current assets.

What are Intangible Assets?

As we enter the 21st century, this orderly approach to accounting for asset value is under attack. While it is widely recognized that the center of gravity in terms of a firm's "economic resources" is shifting from the financial and tangible assets to intangible ones, there are no objective measures.

Why new business models?

Designing New Models "As executives and entrepreneurs search for ways to exploit the

power of the Internet, they're creating new business models that represent an interesting blend of old and new.

Adrian Slywotzky of Mercer Management Consulting suggests, 'If there is one lesson we can learn from the continuing evolution of work and competition in the new economy, it's this...

Change the question and you change the game.' The old question was 'What business am I in?' The new question is 'What's my business model?'

This subtle shift in question represents a major shift in perspective."If you think about it, we spent almost a century building and perfecting the Industrial Age models that defined how we did business. We knew what it meant when someone said, 'I sell cars' or 'I sell insurance.' But today's Internet provides a highly interactive and engaging environment for creating and distributing products and services.

Why new business models?

Designing New Models (cont.)

Harnessing the power of the Internet requires that we invent new models. That invention starts with the customer.“

Indeed, customer experience drives business model design. But, these new models both shape — and are shaped by — the business community within which they operate.

In the past, communities were structured within well-defined industries. Membership was relatively stable and roles were clear. Executives knew how their firm and others in the industry made money. They understood the power structure and they knew the 'rules of the game.'“

Why new business models?

Designing New Models (cont.)

“Today's e-business executives are defining a new business logic and new rules. As they do, e-business models have evolved from 'click and order' to 'click and mortar.' Successful executives have learned that their e-business models must continue to evolve, as they respond to customers' changing needs and the changing business community...”

Professor Applegate, Harvard Business School

Why new business models?

It is helpful to categorize e-business by group, four groups of models:

(i) Producers: Create and package products and services.

American express, ford, wsj.com

(ii) Focus distributors: Enable costumers and sellers to connect,

communicate and transact business.

freemarkets, amazon.com, e-trade

(iii) Portals: Enable costumers and sellers to connect, communicate and

transact business.

aol.com, women.com, quicken.com,

(iv) Infrastructure providers: Produce and distribute digital business

infrastructure.

Cisco systems, fedEx. , oracle, AT&T, doubleclick.net

Emerging E-business

(i) Producers

Producers are differentiated by the following characteristics:

Does the business sell physical products and/or provide face-to-face services?

Does the business sell information-based products and/or services?

Does the business provide customized products and/or services?

Emerging E-business

a. Manufactures Use the Internet to design, produce and distribute physical productsEXAMPLES:

Ford Motor Company; PepsiCo; Proctor and Gamble; GE; Medtronic

LIKELY REVENUES:Product sales; service fees

LIKELY COSTS:Advertising, marketing & sales; content/information asset management; R&D; IT infrastructure

Emerging E-business

b. Service ProvidersUse the Internet to produce and deliver a wide range of service

offeringsEXAMPLES:

American Express; Citigroup; Avis; American AirlinesLIKELY REVENUES:

Commissions; service or transaction feesLIKELY COSTS:

Advertising, marketing & sales; content/information asset management; R&D; IT infrastructure

Emerging E-business

c. EducatorsCreate and deliver online educational offerings

EXAMPLES:Harvard Business School Publishing; Pensare; Docent; and eCollege.com

LIKELY REVENUES:Registration or event fee; subscription fee; hosting fee

LIKELY COSTS:Content/information asset management; R&D; IT infrastructure

Emerging E-business

d. AdvisorsProvide online consulting and advice

EXAMPLES:Andersen Consulting; Ernst & Young; Knowledge Universe; and Mainspring, Inc.

LIKELY REVENUES:Subscription fee; registration or event fee; membership fee; commission, transaction or service fee

LIKELY COSTS:Content/information asset management; IT infrastructure

Emerging E-business

e. Information & News Services

Create, package and deliver online information

EXAMPLES:Internet Securities; Wall Street Journal Interactive; and Individual.com

LIKELY REVENUES:Subscription fee; commission, transaction or service fee

LIKELY COSTS:Content/information asset management; advertising, marketing & sales; IT infrastructure

Emerging E-business

f. Custom Suppliers

Design, produce and distribute customized products (physical and information) and services

EXAMPLES:McGraw-Hill; Boeing; Dell (infrastructure provider)

LIKELY REVENUES:Product sales; service fees

LIKELY COSTS:Advertising, marketing & sales; content/information asset management; R&D; IT infrastructure

Emerging E-business

TrendsThe following trends help define the evolution of producer

business models during the early 21st century:To survive, the producers must be the "best-in-class," either

the #1 or #2 brand. Some large, online/offline service providers, like American

Express and Citigroup in the financial services industry, are evolving to become producer vertical portals.

Industry supplier coalitions are forming to enable business-to-business commerce within industry groups and with key business customers.

Emerging E-business

(ii) Focused DistributorsThe five types of focused distributors are differentiated from each

other by the following characteristics:

Does the business assume control of inventory?

Does the business sell online?

Is the price set outside the market or is online price negotiation and bidding permitted?

Is there a physical product or service that must be distributed?

Emerging E-business

a. Retailers A business following the e-retail model offers physical products

online, maintains control of its own inventory, and sets a non-negotiable price to the consumer

EXAMPLES:Amazon.com; LandsEnd.com

LIKELY REVENUES:Product sales

LIKELY COSTS:Digital "click and mortar" business infrastructure development (for example, personnel, procurement, inventory management, order fulfillment, customer service)

Emerging E-business

b. Marketplace A marketplace sells products and services, such as

insurance and travel. A non-negotiable price is set to the consumer, which usually includes a commission or transaction fee

EXAMPLES:QuickenInsurance; E-Loan

LIKELY REVENUES:Commission or transaction fees on each sale

LIKELY COSTS:Integration of business' existing transaction systems with online supplier databases and transaction systems; product development costs.

Emerging E-business

c. Aggregators Aggregators provide information on products and services

for sale by others in the channel. An e-business following this model offers comparison of features and pricing but does not complete the final transaction or deliver any physical products

EXAMPLES:InsWeb; Autoweb

LIKELY REVENUES:Referral fees; advertising

LIKELY COSTS:Product development; advertising; marketing

Emerging E-business

d. Exchanges An online exchange may or may not take control of its own

inventory; more often, it acts as an auction, or facilitates the exchange of products and services between businesses and other businesses or consumers. The price is negotiated between buyer and seller at the time of the sale. The final transaction may or may not take place online

EXAMPLES:Priceline.com; eBay; FreeMarkets; Chemdex

LIKELY REVENUES:Product sales (if exchange assumes control of inventory); transaction fees or sales commissions; advertising

LIKELY COSTS:Inventory and logistics (if exchange assumes control of inventory); staffing support of auctions (especially for B-2-B) and direct sales services; product development

Emerging E-business

e. Infomediaries A special class of focused distributor that unites sellers and

buyers of information. Because no physical product is involved, the transaction can often be completed online

EXAMPLES:Internet Securities; Individual.com

LIKELY REVENUES:Subscriptions; advertising

LIKELY COSTS:Sourcing, packaging and delivering information; development of value-added content and analytic tools; data mining.

Emerging E-business

Trends As we enter the 21st century, the following trends can be

identified in the focused distributor business model category: Aggregators that are unable to evolve their models to close the

sale, risk disintermediation. Infomediaries that are unable to evolve their models from pure

information brokers to value-added information content creators and producers, also risk disintermediation.

By 1999, most focused distributors greatly improved their flexibility to withstand attacks on any one component of their model by creating hybrid businesses that combined several different business models — each of which generates separate revenue streams.

Emerging E-business

Powerful B-2-B horizontal and vertical portals are emerging that mimic the structure and relationships found in the familiar consumer portal space. Forrester analysts predict that, by 2004, 53% of the over $2.7 trillion in Internet trade will flow through horizontal and vertical B-2-B portals. E-retailers, like Amazon.com, are amortizing their huge investments in digital infrastructure to become vertical retail portals. As they do, they are reviving the Internet mall concept that flourished briefly in the early days of the commercial Internet, but then languished because of the lack of robust transaction capabilities.

Emerging E-business

(iii) Portals Differentiators

The three types of business models in this category are differentiated by the following characteristics:

Does the business provide gateway access to the full range of Internet information and services, including search, e-mail, instant messaging, chat and other community-building tools?

Does the business provide information and services for all types of users, or is the information and services specific to a well-defined affiliation group (e.g., women, the elderly, lawyers, and families)?

Does the business provide access to deep content, products and services within a vertical industry (e.g., financial services) or related industries (e.g., travel)?

Emerging E-business

a.Vertical Portals WHAT:

Vertical portals provide deep content, a place to conduct business, learn, play, or shop, and a set of communications and community-building tools. They are often composed of a number of related focused distribution sites

EXAMPLES:Quicken.com; Expedia

LIKELY REVENUES:Advertising and marketing; affiliate deals; slotting fees; product sales, (if transactions are completed within the portal); referral fees; subscriptions

LIKELY COSTS:Marketing and sales

Emerging E-business

b. Horizontal Portals WHAT:

Horizontal portals provide gateway access to the Internet and a variety of tools for locating information and sites, communicating with others, and developing online communities of interest

EXAMPLES:America Online; Yahoo!; Microsoft Network

LIKELY REVENUES:Advertising and marketing; subscription fees; software licensing and sales

LIKELY COSTS:Network and data center operations; sales and marketing; product development; administration

Emerging E-business

c. Affinity Portals WHAT:

Affinity portals provide deep content, commerce, and community features targeted to a specific market segment (for example, women or senior citizens). Some are targeted toward a specific event (for example, getting married or buying a home)

EXAMPLES:Women.com; The Knot

LIKELY REVENUES:Advertising and marketing; affiliate deals; slotting fees; product sales (if transactions are completed within the portal); referral fees; subscriptions

LIKELY COSTS:Marketing; sales; digital infrastructure development; operations and maintenance

Emerging E-business

Trends The following trends help define the evolution of the

portal model during the early 21st century: The horizontal portal of the 21st century will provide gateway

access — not just to content — but also to the network infrastructure and services. The actions of AT&T and AOL during the late 1990s and early 2000s herald the emergence of vertically integrated, multi-media telephone, voice, video and entertainment broadcast networks. The long-term viability of horizontal portals that fail to vertically integrate with digital infrastructure providers is unclear.

Emerging E-business

During the late 1990s, powerful global Internet service providers have emerged, which promise to provide the infrastructure required for the evolution of global, multi-media horizontal portals. While traditionally based on physical wired networks, wireless infrastructure portals are emerging outside the U.S.

As horizontal portals become the global gateways for accessing a wide range of network, information and communication services, vertical portals are widely believed to be in the ideal position to become destinations within which businesses and consumers will communicate, transact business, learn and play. As a result, many analysts predict that independent focused distributors that do not establish strong portal relationships are vulnerable to loss of power and eventual disintermediation.

Emerging E-business

(iv) Infrastructure Providers Differentiators

Infrastructure providers are differentiated by the following characteristics:

Does the business provide "gateway access" to a complete set of network, data center and/or web site hosting services?

Does the business provide access to hosted application services?

Does the business produce computer and network equipment, electronic components or software?

Does the business provide custom, build-to-order hardware, software or services?

Emerging E-business

a. Horizontal Infrastructure Portals WHAT:

Infrastructure portals include Internet Service Providers (ISPs), Network Service Providers, and WebHosting Service Providers. These firms provide gateway access to a wide range of network (cable, voice, Internet), data center and hosting services

EXAMPLES: ISP's - AT&T, AOL and Roadrunner Cable Services Network Service Providers - AT&T, Sprint, MediaOne, TimeWarner WebHosting Service Providers - US Web/CKS LIKELY REVENUES:

Access and maintenance fees; subscription services; transaction fees. If combined with an online content business (e.g., AOL), the portal may also generate advertising revenues.

LIKELY COSTS:Data and network center operations; software development and maintenance; marketing; sales

Emerging E-business

b. Application Service Providers WHAT:

Infrastructure vertical portals are referred to as Application Service Providers (ASPs). Rather than sell software applications, an ASP hosts and maintains a software application enabling businesses and individuals to log in and conduct business online

EXAMPLES:Oracle's Business Online suite of integrated enterprise applications; Sales.com

LIKELY REVENUES:Hosting and maintenance fees; consulting fees; system integration fees

LIKELY COSTS:Product development; data center and network administration; and customer service

Emerging E-business

c. Infrastructure Producers WHAT:

Infrastructure producers sell computer and network equipment and software applications to businesses and consumers. While channel players dominate producers in the non-high-tech industries, technology producers maintain direct links to customers

EXAMPLES:Cisco; IBM; Microsoft; Lucent; and Dell

LIKELY REVENUES:Sales; consulting services

LIKELY COSTS:Product development; sales and marketing

Emerging E-business

Trends The following trends help define the evolution

of digital infrastructure provider business models during the early 21st century:

The previously rigid lines between the digital infrastructure providers and the digital businesses built on top of the infrastructure are beginning to blur. In addition, globalization of the technical infrastructure is setting the stage for the development of global, multi-media horizontal portals.

Emerging E-business

As we enter the 21st century, there are two competing ASP vertical portal models: producer-portal ASPs (e.g., Oracle, Siebel, SAP and PeopleSoft) provide online access to their brand name software and independent ASPs offer a full suite of Internet hosting services across a broad range of software brands (e.g., US Internetworking). The latter claim that customers want the flexibility to choose from among many different "best-of-breed" brand solutions. The former claim that customers want an integrated solution and an "umbrella brand" that they trust.

Emerging E-business

Direct-to-customer hardware and software producer-distributors were early adopters of online commerce and have been able to either bypass channel intermediaries or create their own portals. Cisco commands an impressive lead, with over 80% of their sales online.

Executive Insights AOL

Katherine Borsecnik, Sr. VP E-Commerce & Strategic Businesses, America Online, on the evolution of AOL's business model

"The business model for American Online is a mixed model. Our primary business model, historically, has been one of a subscription-based business. In recent years we've been diversifying our business model to the point where approximately 30% of our revenues now are derived from sources other than subscription fees, primarily transactions and advertising . . .

Executive Insights AOL

"In the early days AOL was a communications medium for a very small and very homogenous group of users. When I first started at AOL, it wasn't called AOL, and it certainly wasn't called the Internet! We were basically a chat service for big burley guys. Our audience was primarily 18 to 30 year old males whose primary interest was in computing, computers — they were technologists. And in the early days the service basically ran at 300 baud, which was exceedingly, painfully slow. About all you could do on a service at that point was chat. It was, basically, a text-based service. There was no video, no arts, no pictures, no sound . . . In the early days our business model was derived from charging an hourly fee. We used to have people on line who would chat for hours and hours during a month and would have these amazing Internet bills of $300 a month — what we called our heavy users. We had a variable subscription-based model. People paid us by the hour for every hour they spent online, probably for the first five years or so of the service. Then we went to a flat-rate pricing model, and our customers started paying us $21.95 a month. It's about three and a half years since we made that change."

Executive Insights Chemdex and Ventro

Dave Perry, Founder/CEO, Chemdex and Ventro, on B2B models, switching costs, and strategic sales

"The next wave that is being adopted right now is business-to-business e-commerce. Not only is the opportunity large, but the business models fundamentally make more sense. First, the things that companies like Chemdex are selling are non-discretionary, recurring purchases. These are things that people use for their day-to-day business, and therefore they buy a lot of them . . .

Executive InsightsChemdex and Ventro

"Most importantly, the switching cost are fundamentally different. If you don't find what you are looking for on Amazon or for any reason aren't happy with Amazon, typing in BarnesandNoble.com is as simple as doing just that. Chemdex, on the other hand, makes a strategic sale to a company. So an institution — a bio-tech company or a pharmaceutical company — makes a strategic decision to buy through us. They make a financial commitment to us. They allow us to tie into their HR database and the financial systems, and their ERP system. We train their end users on how to use it, we roll it out to all employees, they have a significant vested interest in us succeeding and therefore it is really hard — we have to mess up badly — for somebody to come along and replace us."

Professor Applegate's Insights

The blurring of digital business and infrastructure providers "For e-businesses of the 21st century, the digital infrastructure has become

embedded within the very fabric of how firms create, produce and distribute products and services. In recognition of this reality, any e-business model classification must reflect both the digital businesses fashioned from new networked technologies and the businesses that provide the digital infrastructure. In the past, digital infrastructure providers were called technology firms. They sold to — but did not participate as — digital businesses. Today, that distinction is blurring. Not only are technology firms, like Microsoft, Hewlett-Packard, Cisco and IBM, launching digital businesses, but digital businesses, like Amazon.com, Charles Schwab and Quicken.com, are also becoming technology infrastructure providers. Among digital business models, horizontal and vertical portals are emerging as a dominant source of power. Focused distributors, such as pure aggregators and infomediaries, which do not allow customers and the business community to transact business online are losing power. Among digital infrastructure business models, producers that sell online directly to customers and new infrastructure portals (for example, Internet and network service providers, application service providers and web hosting services) are dominating the business landscape."