Internet zoo spawns new business models

What the Dickens is going on with Internet stocks? Since the New Year, share prices of Internet players like Yahoo!, Excite! and Amazon.com have risen by ten per cent a day. Internet backbone provider Cisco Systems, which didn’t exist ten years ago, has a market capitalisation bigger than Ford, General Motors and BT.

Yahoo!, whose share price soared 13-fold last year, is now worth more than Boeing. Likewise, America Online’s market cap now exceeds Disney’s – prompting an ever-so-slightly rattled Rupert Murdoch to weigh in with some splashes of cold water.

He’s obviously right. There’s a whiff of South Sea Bubble here. But that doesn’t necessarily mean US investors have gone off their collective trolley. For two very good reasons. First, the Internet is now the biggest source of business – and therefore marketing – innovation. Consider just a few of the beasts in this zoo.

We have the Amazon.com model of retailing – effectively infinite stock and zero property and one click shopping, which makes traditional shopping look both expensive and a nuisance. We have the Dell Computers model of manufacturing: cut out the middleman (and his margin) and make to order. Both of these eliminate all manner of unnecessary costs while building much closer information-exchanging relationships with customers to help drive innovation.

Then there is the Cisco Systems model of the virtual company. It massively cuts operating costs (it estimates $500m a year – 309m) by doing virtually everything, from employee expenses to order taking (about $20m a day – 12.35m) to sending technical specifications to suppliers, through the Internet – to such a degree that it routinely organises its sub-contractors to produce, test, ship and install its equipment without Cisco staff ever actually touching it.

And these are only some of the more established species. We have real time virtual auctions. And reverse auctions, where bidders say “I’m prepared to buy X for Y, anyone want to sell?” Meanwhile, with upstarts such as MP3.com and E-trade taking advantage of the Internet’s ability to distribute digital content virtually free, traditional information marketers such as recording companies and stockbrokers are seeing the rug whipped from under their feet.

Indeed, if University of California professors Carl Shapiro and Hal Varian are right, the Internet is sparking a revolution in pricing strategies, as it severs the link between prices and costs. They argue in their new book, Information Rules, that in future prices will simply reflect value to the customer.

The downside will be that they are forced to give product away free and make money on “extras”. On the upside, however, are some stupendous margins. Standard voice recognition software now sells at less than $100 (62), for example. But special purpose medical voice recognition software sells at $8,000 (4,938) a throw.

But there’s a lot more waiting in the shadows. How about a new breed of virtual retailers who lose money on every sale? Impossible? Well, study Buy.com (slogan: “the lowest prices on earth”) which does exactly that, attracting millions of site visitors, and generating its profits from selling ads on that site. It is well on the way to becoming the fastest growing company in US history.

Or how about using the Internet to get customers to be your unpaid employees? Each time you fill in a form, giving name, address and financial details, you save the organisation you are dealing with significant administrative costs. According to some, such as Penong Chen, BroadVision president and chief executive this “self-service” is the only way one-to-one marketing can ever become cost effective on a mass scale. He predicts Websites which automatically customise their content to the customer’s profile (BroadVision’s business) will be used by customers as personal portals into companies. This will allow them to access information, services and to conduct the transactions they want. These sites “make your customers your best employees”, says Chen.

And there’s more. Take “infomediaries”. As well as companies collecting data about customers, in future customers will collect data about themselves (their own purchases, TV viewing, leisure and travel patterns and so on). And they will turn that information to good effect by letting Internet-based agents use it on their behalf in dealings with suppliers. Message to Ford: I have 1,000 customers looking for an Escort, what price do you bid for their custom? McKinsey consultants John Hagel III and Marc Singer call it reverse marketing, in their forthcoming book Net Worth. “In order for consumers to strike the best bargain with vendors they’ll need a trusted third party – a kind of personal agent or infomediary – to aggregate their information with that of other consumers and to use the combined market power to negotiate with vendors on their behalf.” This will turn the marketing world upside down.

What all these examples demonstrate is how the Internet is spawning a zoo of new business models which are revolutionising the way we think about how to organise businesses, how to construct relationships with suppliers and customers, how to create value for them, and how to make money in the process; in other words, revolutionising marketing.

The point about Internet share prices is that investors have suddenly realised this is for real: “the foundation for a new industrial order”, as strategy guru Gary Hamel puts it.

What’s more, the Internet is gaining consumer critical mass at breathtaking speed. And many of the new models are already beginning to demonstrate, not only that they work in their own right, but their potentially devastating effect on traditional players. Further, many of their ideas have obvious applications and implications for old world marketers.

Which leads us to the second reason why there is some method in US investors’ madness. No doubt many of these new beasts will die young. But just as companies such as Coca-Cola, Procter & Gamble, Ford and GM invented the business models, created the rules and benchmarks, and generally shaped an entire era of marketing, so it’s now becoming clear that somewhere in that Internet zoo lurk the Coca-Colas and P&Gs of tomorrow. And would you dare miss being at the beginning of that?

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