Internet business models

(or The Year of Living Dangerously)

Daniel Collico Savio

Telefonica de Argentina
Defensa 143 Piso 5
Buenos Aires, Argentina
5411 4332 9679
collicod@advance.com.ar

March 2001

Keywords
Internet, business models, new economy, Amazon, Yahoo, eBay, Nasdaq crash, bubble

Abstract
The Nasdaq Composite began its fall on Friday 14'th of April 2000 signaling the end of
a remarkable speculative high-tech bubble started in spring 1997. The closing of the
Nasdaq Composite at 1,850 while this paper is being sent (March 29th, 2001)
corresponds to a total loss of over 64% since its all-time high of 5,133 on the 10th of
March 2000. Similarities to the speculative bubble preceding the infamous crash of
October 1929 are quite striking: the belief in what was coined a "New Economy'' both
in 1929 and presently made share-prices of companies with three digits price-earning
ratios soar.
We are living now in the Internet post-crash age. The net is no longer what it used to be.
There are plenty of similar dotcom firms seeking secound round capital, while Venture
Capitalists are no longer interested in funding Internet projects.
Many experts1 predict that only 10% of the dotcom companies will survive. Besides, the
web is not ramping as fast as before. Several studies show that Internet growth is
reaching a plateau and that people also are spending less time online.2

1
“Living in Freefall” (The Economist, Nov 2000).
Online version available at http://www.economist.com/displayStory.cfm?Story_ID=423505
2
“Internet Domain Survey” (Internet software Consortium, Jan 2001)
http://www.isc.org/ds/WWW-200101/hosts.gif

1
Mostly because of negative news and the precedent hype, Internet is still in the focus of
the debate. This paper discusses existent Internet business plans from a realistic, bad-
news perspective. Very few dotcoms are likely to succeed, only those with powerful
alliances with the Old Economy, or those very quick in moving towards new business
models. From this point of view, some relevant examples (such as Amazon, Yahoo or
eBay) are discussed.
Something has changed in the last year. No one is glad the bubble has burst. For
entrepreneurs, it is harder to get funded, valuations are lower and due diligence takes
longer. For investors, portfolios are worth a lot less and employees are quitting because
their stock options are under water -or simply, are being fired-.
Life used to be sweeter when Nasdaq was at 5,000.

Introduction
The history our civilization is, in large measure, a history of exploring networks: from
the natural distribution of rivers that conveyed people and goods between ancient cities,
to the development of network of railroads and river canals that crossed continents in
the 19th century, to these days where communication networks (telegraphy, telephony,
and so) emerged. We have been "navigating" networks long before Netscape hit the
scene.

Now we are confronted with the vast network of networks, the Internet, which offers us
an unprecedented level of "connectivity" as we live, learn, work and play. We can think
of the Internet purely in terms of technology, but several other views are possible.
Internet can be described in terms of an economic, social and cultural transformation. It

2
may be as important to the next century as industrial capitalism was to the past hundred
years.
Business models are the most discussed and least understood aspects of the web. There
is so much talk about how the web changes “brick & mortar” business models, but there
is little evidence of what this means.
Roughly, a business model is a method of doing business by which a company can
generate revenue, and then sustain itself. The business model explains how a company
makes money by specifying where it is placed in the value chain.
Some models are astonishingly simple. A company produces a good or service; then
sells it to customers. If everything goes as planned, the revenues from sales exceed the
cost of operation and the company realizes a profit.
Other models can be more complicated. Radio and television broadcasting is a good
example, since programming has been broadcast over the airwaves free to anyone with a
receiver for much of the past century. The broadcaster in turn is part of a complex
network of distributors, content creators, advertisers, agencies, and non-paying watchers
viewers. In this chain, it does not appear clearly who is making profits, because the
bottom line depends on many competing factors.
The attention of investors is being directed again towards e-commerce, will give rise to
new kinds of business models. That much is certain; but the web is also likely to
reinvent tried-and-true models, like auctions.

A possible taxonomy of business models

Although there is no single, comprehensive and complete taxonomy of web business
models3 , this is a possible one –including outstanding examples-:

Brokerage (eTrade) Affiliate (Link Exchange)

Auctions (eBay) Community (The Hunger Site)
Advertising (Yahoo) Subscription (The Economist)
Infomediary (New York Times) Access Model (AOL)
Merchant (Amazon)
3
See Digital Enterprise http://digitalenterprise.org by Michael Rappa, or Jeffrey F. Rayport’s “Truth
about Internet Business Models” http://www.strategy-business.com/briefs/99301/page1.html

3
Any given firm may combine different models as part of its business strategy. Thus, an
advertising model may be blended with a subscription model . This yields an overall
strategy that is profitable –which indeed is the main interest in these post crash days-.
As business models on the web evolve rapidly, new and interesting variations can be
expected in the future.

1. Brokerage Model

Brokers are market-makers: they bring buyers and sellers together and facilitate
transactions. Those can be business-to-business (B2B), business-to-consumer (B2C), or
consumer-to-consumer (C2C) markets. A new emergent subcathegory is that involving
employees (E) of a large firm, thus producing B2E business.
A broker makes its money by charging a fee for each transaction it enables. Brokerage
models can take a number of forms, such as the following.

Online financial brokerage, like eTrade, where customers place buy and sell orders for
transacting financial instruments. Also, travel agents fit into this category. Here the
broker charges the buyer and/or seller a transaction fee. High volume, low overhead,
best negotiated prices are the characteristics. CarsDirect is a good example.

Market Exchange: an increasingly common model in B2B markets. Good examples

are MetalSite or ChemConnect. The broker typically charges the seller a transaction fee
based on the value of the sale. The pricing mechanism can be a simple offer/buy,
offer/negotiated buy, or an auction offer/bid approach.

Vertical web community, a concept pioneered by VerticalNet. The site acts as an

essential source of information and dialogue for a particular vertical market. In this way,
communities obtain product information in buyers' guides, supplier and product
directories, daily industry news and articles, job listings and classifieds.

Distributor: A catalog-type operation that connects a large number of product

manufacturers with volume and retail buyers. Broker facilitates business transactions
between franchised distributors and their trading partners. For buyers, it enables faster
time to market and time to volume as well as reducing the cost of procurement. For

4
distributors, it decreases the cost of sales by performing quoting, order processing,
tracking order status, and changes more quickly and with less labor.

Buyer Aggregator: in this model, firstly developed by Accompany, buyer aggregation

is analyzed as the process of bringing together individual purchasers from across the
Internet to transact as a group so they can receive the same values traditionally afforded
to organizations who purchase in volume. Sellers pay a small percentage of each sale on
a per-transaction basis.4

Virtual Mall: many online merchants together. The mall typically charges web design,
setup, monthly listing, and/or per transaction fees (see Yahoo! Store's terms). The
virtual mall model may be most effectively realized when combined with a generalized
portal. More sophisticated malls will provide automated transaction services and
relationship marketing opportunities (like Women.com's Shopping Network).

Metamediary: a business that brings buyers and online merchants together and
provides transaction services such as financial settlement and quality assurance. It is a
virtual mall, but one that will provide transaction and billing services. The metamediary
protects consumers by assuring satisfaction with merchants; also, charges a setup fee
and a fee per transaction. Virtual malls are expected to move more in this direction.
(HotDispatch, Amazon 's Shops, etc.).

2. Auction Model

No where perhaps is the impact of the web more evident than in the case of auctions. A
collection set of sites now conduct auctions for sellers (individuals or merchants).
Broker charges the seller a fee, which is typically scaled with the value of the
transaction. Seller takes highest bid(s) from buyers above a minimum.

Auction Broker: essentially, it is a site that conducts auctions for sellers. Auctions can
vary in terms of the offering and bidding rules, but in fact are one of the oldest business
models. They have been widely used throughout the world to set prices for agricultural

4
This model was enthusiastically applied in Latin America, apparently because of cultural reasons.
Comunia and Agrupate were two examples; they did not succeed.

5
commodities, financial instruments, and unique items like fine art and antiquities. Now,
auctions have reach the Internet, with eBay as an outstanding example.

Reverse Auction: also called "demand collection" and "shopping by request". In this
scheme, the prospective buyer makes a final (sometimes binding) bid for a given good
or service, and the broker seeks fulfillment. In some examples, the broker's fee is the
spread between the bid and fulfillment price; a processing charge is also frequent. This
model is frequently aimed at high-priced items like automobiles or airline tickets.
(Priceline5 , Respond.com, MyGeek.com).
This model tried to reshape the airline industry. For some budget carriers, online sales
now make up 90% of the total, although for mainstream airlines the share is still below
5%.

Search Agent: an intelligent software agent or robot (an “agent”) is used to search-out
the best price for a good or service specified by the buyer, or to locate some valuable
information (MySimon, RoboShopper, ShopFind). Also, an employment agency can act
as a search agent broker, finding work for job-seekers or finding people to fill open
positions listed by an employer. CareerCentral6 is a successful example: membership
includes advice from industry experts and career assessment.

3. Advertising Model

The web advertising model is an extension of the traditional media broadcasting model.
A web site is the broadcaster in this case, and provides content -usually for free- and
services (webmail, chat, forums). Within the site page there are many advertising
messages in the form of banner ads, which are the major or sole source of revenue for
the broadcaster, along with sponsorships, rich media, instertitials, etc.
The broadcaster may be a content creator or a distributor of content created elsewhere.
This business model only works when the volume of viewer traffic is large (a so-called
“portal”, a highly misunderstood word).

5
Priceline is not doing very well: in Nov 2000, 20% of employees were fired.
6
This tool become a couple of months ago CruelWorld (such an ironic name to a RRHH site), and finally
was adquired by Spencer Stuart.

6
 Horizontal Portal: a high-volume traffic page. This means typically tens of millions of
visits per month (see chart of TopMail 7 ). This traffic is driven by generic content in the
case of “generalized” portals (AOL, Terra, UOL) or services, like search engines and
directories (Excite, Google, Yahoo!). The high volume makes advertising profitable
and permits further diversification of site services. Competition for volume has led to
the packaging of free content and services, from e-mail to local information.

250000

TopMail growth of users (Oct 98 - Jan 00)

200000
Theoretical Fit (black line)
y = -0,0022x3 + 241,78x2 - 9E+06x + 1E+11
150000

100000

TopMail users (blue squares)

50000

0
dic-98

dic-99
nov-98

nov-99
jun-99
mar-99

may-99

jul-99
oct-98

oct-99
feb-99
sep-98

abr-99
ene-99

ago-99

sep-99

ene-00
The equation inside the chart reveals the mathematics underlying viral marketing8 . It is
not difficult to predict the number of users in a given time, usually as a function of
money spent in advertising budgets. The need of such a growth explains why many
small dotcoms spent huge amounts of money (sometimes up to 50% of total budget) in
banners... which in turn was the fuel for bigger dotcoms.

Personalized Portal: the previous model reveals a rather generic nature and this
undermines user loyalty. Instead, in a personalized portal, each visitor is able to
customize the interface and content. This increases loyalty, because the user's own time
is invested in personalizing the site.

7
TopMail was the first webmail in Argentine. Launched in Oct 98 by Telefonica, it reached massivity
(300 K users) in a year and a half. However, its business model, funded in banners, did not succeed.
8
Viral marketing is an amazing and zero-cost weapon. It consists mainly of word of mouth -of mouse, in
Internet jargon- and effective URLs below messages.

7
 Specialized Portal (or “Vortal", vertical portal). Here volume is less important than a
well-defined user base (about 1-5 million visits per month). For example, a site that
attracts only golfers, or home buyers, or new parents, can bea better choice for certain
advertisers who are willing to pay a premium to reach that particular audience.

Attention / Incentive: also called "pay for attention" model, pays visitors for viewing
content and completing forms (“sweepstakes”) in order to get some prize. This model is
useful to companies with very complex product messages, which might otherwise find it
hard to sustain customer interest. Some loyalty-based relationship marketing approaches
are Netcentives, or MyPoints.

Free Model: give users something for free, like web site hosting (Geocities, Tripod,
Xoom), web services, Internet access (Alternativa or Tutopia, in Latin America),
electronic cards (BlueMountain), and so on. Freebies create a high volume site for
advertising opportunities. Frequently technical costs undermine the viability of this
model. This is why the next move of this model is become an infomediary model.

4. Infomediary Model

Data about consumers and their buying habits are extremely valuable, after an adequate
data mining process and the identification of technographic9 groups. Some firms are
able to function as infomediaries by collecting and selling information to other
businesses. An infomediary may offer users free Internet access (NetZero) in exchange
for detailed information about their surfing and purchasing habits. This model can also
work in the other direction: providing consumers with useful information about the web
sites in a market segment that compete for their dollar.

Recommender System: is a web site that allows users to exchange information with
each other about the quality of products and services, or the sellers with whom they
have had a purchase experience (Deja’s usenet discussion service, Livra in
LatinAmerica). Such agents monitor a user's habits, thereby increasing the relevance of
its recommendations to the users needs and the value of the data to the collector.

9
See Forrester’s report on “Consumers and Technographics” at
http://www.forrester.com/Research/Lens/0,1040,13,00.html

8
Recommender systems can take advantage of the affiliate model offered by merchants
to augment revenue from the sale of consumer information.

Registration model: Content-based sites that are free to view but require users simply
to register (other information may or may not be collected). Registration allows
intersession tracking of users' site usage patterns and thereby generates data of greater
potential value in targeted advertising campaigns. This is the most basic form of
infomediary model. The online version of New York Times is an example.

5. Merchant Model

This is a typical situation for classic wholesalers and retailers of goods and services
(known as "e-tailers"). Sales may be made based on list prices or through auction. In
some cases, the goods and services may be unique to the web and not have a
traditional "brick-and-mortar" storefront.

Virtual Merchant: a business that operates only over the web and offers either
traditional or web-specific goods or services (pure-play e-tailers). The method of selling
may be list price or auction. An example of a service merchant is Facetime, which calls
itself an "application service provider". It offers live customer support for e-commerce
web sites. Amazon is a remarkable example.

OnLine Make Up : traditional brick-and-mortar establishment with web storefront.

The model may origin a channel conflict within the firm. (Gap, Barnes & Noble).

6. Affiliate Model

This model is the opposite to the the generalized portal, which seeks to drive a high
volume of traffic to one site. In this case the affiliate model provides purchase
opportunities wherever people may be surfing, by offering a percentage of revenues to
affiliated partner sites.
The affiliates provide purchase-point click-through to the merchant. It is a pay-for-
performance model: if an affiliate does not generate sales, it represents no cost to the

9
merchant. The affiliate model is coherent with the intrinsic logic of the web, and that
explains its popularity.
Many variations are possible: banner exchange, pay-per-click, and revenue sharing
programs. Some potential problems loom ahead that may inhibit the diffusion of the
affiliate model due to the granting of a broad patent to Amazon.com. Hence, this so-
called perfomance marketing allows e-business firms to promote their goods and
services on tens of thousands of relevant online locations, paying only when a sale is
made.

7. Community Model

User loyalty is the key element in this model, as opposed to high traffic volume. Users
have a high investment in both time and emotion in the site –which in turn are elements
difficult to evaluate for venture capitalists-. In some cases, users are regular contributors
of content or money. Having users who visit continually offers advertising, infomediary
or specialized portal opportunities. There is also the chance of enticing them with a
subscription fee for premium services.

Voluntary Contributor Model -similar to the traditional public broadcasting model-

the listener or viewer contributor method used in not-for-profit radio and TV
broadcasting. The model is predicated on the creation of a community of users who
support the site through voluntary donations.

Philanthropy model: Not-for-profit organizations (NGOs, NPOs) may also seek

funding from charitable foundations and corporate sponsors that support –not always

10
with money, sometimes just by clicking a button- the organization's mission. The web
holds great potential as a contributor based model because the user base is more readily
apparent. (Charitable Way, TheHungerSite, etc). Sometimes what is needed is just the
web surfer’s CPUs processing time (Seti@Home).

Knowledge Networks: or expert sites, that provide a source of information based on

professional expertise of other users. Typically a forum is established where persons
seeking information can pose questions and receive answers from (presumably)
someone knowledgeable about the subject. The experts may be employed staff, or
simply anyone on the web who wishes to respond. (ExpertCentral, recently Datos en la
Web in LatinAmerica). Another good example is Guru.Net10 .

8. Subscription Model

Users pay for access to the site, so high value-added content is essential (ex: Wall St.
Journal, The Economist). A 1999 survey by Jupiter Communications found that 46
percent of Internet users would not pay to view content on the web. Some businesses
have combined free content (to drive volume and ad revenue) with premium content or
services for subscribers only.
Other examples is Salon.com, which jumped to the Internet arena five years ago, when
webzines were supposed to be millionaire business. Reality has turned to be rather
tough for them. Slate.com –indeed a Microsoft iniciative-, was forced to develop a
printed edition while offering the original web version.

9. Access Model

As simple as offering high-quality Internet connections to massive householders and

SOHOs. AOL stands as an emblematic example in this field, no matter if Internet traffic
is charged as a fixed fee (about $25 monthly) or dependent of time. As long as the
Internet user would value his email account, he will not move to another ISP. Free
access is a minor possibility here, related to the Advertising Model. About 12 million of
Internet US surfers are accesing the net via NetZero, Juno and Bluelight

10
Recently GuruNet has changed its strategy and shifted towards Atomica because of trade mark
problems.

11
Case Study 1: Amazon

Amazon has become synonymous with e-commerce; today is one of the few Internet
brands recognised the world over. It is the most visited e-commerce website in America,
and one of the top two or three in Europe and Japan. Now it is trying to stretch its brand,
which to most people is related to books, to cover anything that can be sold online.
Roughly, Amazon’s appeal is related to being the cheapest place to shop on the web.
Thanks to its large investment in warehouse distribution centres, Amazon has the best
reputation in the business for fulfilment and delivery. Its patented “one-click”
technology makes shopping delightfully simple. And by pioneering consumer reviews
of books and other products, and using its database to make recommendations, it has
built a sense of community among users: 66% of sales go to repeat customers.
On the other hand, Amazon seems to suffer from a congenital lack of profitability.
Amazon’s announcement of record losses in the fourth quarter of 1999 was softened by
the claim that it was at last making profits on books alone. The firm has also shed staff,
for the first time. And the stockmarkets are increasingly sceptical about it.
Jeff Bezos (Amazon’s CEO) has a word of advice for small investors or those looking
for short-term gains: “don’t put your money into Internet stocks”. May be this phrase
includes his own company.
Amazon has lost around 90% of its value since the beginning of last year. Like other
dotcom stars, Amazon is experiencing traumatic changes. Although with nearly $3
billion of sales and its extraordinary growth, the company has yet to turn a profit. Some
analysts still fear the company will run out of cash. And most shareholders seem to be
praying that it will find a traditional retailer to buy it and save it. It was reported in
March 2001 that Amazon was closing an alliance with Wal-Mart, America’s big
discount chain. The talks were quickly dismissed by both sides as inconclusive. But the
two firms look like a great fit: Wal-Mart’s distribution network together with Amazon’s
web-savvy marketing could make a powerful combination.

12
Case Study 2: Yahoo!

Yahoo was one company that seemed to have it figured out. In six years, it transformed
itself from a student's list of cool Web sites into a sprawling network serving 185
million people a month. Few companies on the planet have that many customers.
Particularly notable was the Yahoo! rise of 769% in the FT500 ranking of 1999, were
three-figure increases were fairly commonplace 11 .
Since the explosion of the bubble, there are some troubles. Yahoo's revenue will be
$170 million to $180 million in the first quarter, instead of the $320 million expected.
With a backlog of $117 million in previous commitments for this quarter, it seems that
Yahoo! foresees no more than $63 million in new sales.
Yahoo's management will not venture a guess about its full-year results. But analysts
now forecast sales of $800 million for the year, down from $1.1 billion in 2000. Profits
are unlikely.
The company's $1.7 billion in cash will keep it in business through the tough times. Its
problem, simply put, is to figure out what business it wants to be in. No longer can
Yahoo rely on easy multimillion- dollar deals from other dot-com companies. It is
scrambling to find new sources of revenue. And it must find ways to sell both the
traditional "banner" advertising and creative new formats to skeptical big companies. It

11
Astonishingly, Yahoo! was ranked in the position 18. Its superb growth was far above of Old Economy
giants such as AT&T (58%), BT (84%), and US West (38%) – “Restructuring the telecommunications
industry via takeovers, demergers and joint ventues”, Peter Curwen, July 2000).

13
boasts of a range of innovative experiments, like the "Yahoo Grape" Slurpee soft drink
that 7-Eleven tied to an online promotion. But in many cases, including that one, the
advertisers have paid little or no cash12 .
In January, Yahoo slipped from second to third in the monthly ratings by Media Metrix,
a research concern that tracks the popularity of Web sites in the United States, behind
AOL Time Warner and Microsoft's MSN. But with 55 million domestic users, 65
percent of the total audience, Yahoo's problem is not attracting users. It is finding a way
to make money from them. Indeed, if Yahoo cannot discover how to thrive with its
huge, then the future is dire for the rest of smaller companies that hope to build a media
business on the Internet.

US dollars (millions) Global Online Advertising 1999-2005

30000
Other
Australia/NZ
25000
Latin America
Asia
20000 Western Europe
North America
15000

10000

5000

0
1999 2000 2001 2002 2003 2004 2005

Case Study 3: eBay

By now everyone has heard of eBay, the pioneer in person-to-person online trading. The
firm was founded in 1995, and now provides millions of auctions, and thousands of
new items every day from which bidders may choose. In April 1999, with an ironic
twist emblematic of how the web has jolted the business world, eBay acquired the
venerable Butterfield & Butterfield, the world's fourth largest (traditional) auction house
founded in 1865.

12
"They are so dependent on online advertising that we don't think they will grow that much until they
change the form of their advertising to attract more traditional companies," (Report from Goldman,
Sachs, Feb 2001).

14
eBay is the most famous of the auction web sites, but already it has more than 1,500
rivals. The market for consumer-only auctions is projected to grow from 1.5 million
registered users and $1.5 billion in revenues in 1998 to 17.5 million users and $15.5
billion in revenues in 2001. Business-to-business and business-to-consumer auctions are
also projected to grow and will likely prove to be a bigger market. Forrester Research
projects a staggering $52.6 billion in sales at B2B auctions by 2002.
eBay runs online auctions, acting as little more than an intermediary with low
overheads. For its services it takes between 7% and 18% of any sales. Analysts expect
that the company’s operating margins could eventually average around 35% on
revenues, which in turn could grow by up to 50% a year. And yet, despite trying to
expand into other areas, eBay is still seen as a site on which to trade “collectables” (rare
Barbie dolls and so on). To expand further, eBay also needs partners.
Recently (March, 2001) Microsoft and eBay announced that they have formed a
strategic alliance to jointly develop e-commerce applications and expand the presence
of both companies in the Web. Microsoft is not exactly an old-economy company,
although in Internet terms the Seattle-based software giant is at least middle-aged.
The alliance, which calls for broad cooperation between the two companies, will
initially focus on three key initiatives: the integration of eBay's marketplace into
selected Microsoft Web sites, eBay's deployment of Microsoft's Passport technology,
and the use of Microsoft's .NET technology by eBay.
On Monday March 12th there was signed a broad alliance.... On the face of it, the deal
mostly involves technical and software issues, which will help the two companies,
develop their use of the Internet. However, it will also help eBay expand its
influence because Microsoft sites will start to carry eBay’s listings.
Microsoft will also offer eBay’s buyers and sellers additional services, such as billing
information. As Microsoft’s sites are, collectively, among the biggest in drawing
worldwide Internet traffic, the alliance could prove a big boost for eBay.

15
The ISP factor
Consider that in the beginning there was a marvelous model for making money in the
online environment: the content business. The economic basis for it: connect-time
revenue splits. It is the time-honored mode that made often small or unknown content
providers on America Online (AOL) rich and famous. Its rules were simple. Content
providers fueled online AOL services and got credit for helping keep users online. Since
users paid by the minute or hour, this generated connect-time revenues that were
allocated according to a negotiated split between content providers and online services.
When the numbers of users became large, these deals could generate unexpected riches.
The scheme also worked beautifully for media companies supplying information that
captivated users (such as Viacom's MTV with information on rock videos and pop
music or Gannett's USA).
Indeed, to this very day, tens of thousands of information services continue to benefit
from such a system in Europe (ancient Minitel, for instances) but the system no longer
exists in the United States. When AOL saw its franchise under threat from flat-rate
monthly pricing ISPs, it shifted course to an "all you can eat" pricing plan. That was the
end of content providers in US.
Now, AOL has moved away from this model. Like many other ISPs today, most of its
business relies on telephone traffic13 .

Internet calls distribution

1000000

Tech failures
Number of calls

100000

Emailers

10000 Navigators

1000
0 5 10 15 20 25 30 35

Time (min)

13
The chart shows the ISP original role of “trafic machine”. Several groups of Internet users can be found
within these “peaks”.

16
Learning from the AOL lesson, one should carefully examine which could be the role of
an ISP, beyond the connectivity model.
Access: ISP as a main road to the Internet highway (the initial metaphora again).
Premium services: only available as far as high-speed connections are available.
These are pull, non-intelligent services.
Mobile Internet services, which are on the rise because they allow the ISP to become
independent of the limitations of time. The huge success of Internet as we know it today
is partly due to the fact that the Internet has overcome the limitations of space. Pull
services as we have them today, might be replaced by intelligent content push services
where an ISP knows what kind of information is relevant for your user.
ISPs will also be better positioned to market on-location services that provide
information to the customer relevant to where he is at that moment.
One example of this is marketing alliance deal Telekom recently sealed with Compaq
Computer to provide mobile access to Microsoft Exchange applications and to other
operative intranet business applications. Telekom's T-Mobil said it will also develop an
enterprise portal for personalized access to product and services portfolios. Compaq and
T-Mobil formed a strategic alliance with Microsoft at the beginning of March, adopting
Microsoft's Groupware Exchange to connect T-Mobil's T-D1 network to mobile devices
such as Pocket PCs, WAP phones or phones with HTML browsers. The companies also
plan to open a Wireless Competence Center (WCC) in Munster, Germany, to develop
and test wireless products and services.
ISP as a pre-filtering entity is another possible role. An ISP should have to provide
the customer with information where you know that this information is relevant to him.
Today the Internet provider just gives the customer access to all information that is
available in the world.

17
About valuation of Dotcoms

What should be the best way to compare valuations of Internet stocks? One measure has
gained more or less universal acceptance: the ratio of stock price to annualized sales, or
revenue per share. The popularity of the PSR14 (price/sales ratio) reflects investor belief
that it's more important for Internet companies to grow revenue than profit, and that
revenue is proxy for marketplace acceptance and market share. Without this acceptance
and market share, profit potential is limited. PSR creates a common measure for
comparing companies and their investors' expectations on that basis.
But PSR is trickier than the more traditional price/earnings ratios. A penny of earnings
means essentially the same thing regardless of industry or sector. Revenue, however,
demands closer consideration of the nature of the basic business. Comparing Yahoo
(YHOO) and Terra Lycos (TRLY15 ) to Amazon.com (AMZN) and to eBay (EBAY)
offers an illustration.

AOL and eBay are not doing that bad. They have already followed the general law of
decayment post-crash, but they are not so dependent on advertising, and both have
strong partners.

14
“Parsing the price-to-sales ratio” (David Simmons, RedHerring, March 1999)
15
I must admit an overdone interest in the Terra Lycos case. It belongs to Telefonica group –the same as
Telefonica de Argentina- and I am somewhat close to these people.

18
There is no need to further comments about this Terra-Yahoo chart, which talks
eloquently about what is happening with these advertisement-based dotcoms.
In practice, PSR really is a measure of gross margin leverage. So a more direct starting
point for comparing e-tailers to Yahoo! et al is a price to gross profit ratio (PGPR). In
addition, simply comparing Internet stocks against each other says nothing about
intrinsic value. When there is a major correction in the overall stock market, or just in
the Internet sector, net stocks that appear undervalued relative to their peers can be
hammered just as much, if not more.
Most importantly, the news and psychology that so heavily influences Internet stocks
can swamp empirical measures of valuation. So one Internet stock appearing
undervalued or overvalued relative to others does not mean as much as with traditional
stocks. And, of course, as with all stocks, appearances are just a starting point for
analysis and selection.

19
Conclusions

The aim of this paper is to describe several Internet business models, many of which
failed in some basics conceptions from the Old Economy.
Which, in turn, conducted us to the next question: can we talk about Old and New
Economies, when the first is now taking revenge and the latter is approaching zero16 ?
If a business is suffering from a severe congenital weakness, it has nothing to do with
New or Old economy.
In just three or four short years, e-commerce has evolved at lightning speed through a
succession of persuasive business models and approaches. Still, there is a problem: each
business model seemed viable only for a few minutes or hours, not weeks or months or
years. Moreover, each successive iteration seemed to invalidate much of what had come
before.
Three years ago the absolute kings were connectivity and content –as it was mentioned
in the ISP chapter-. But then, the very ideas of selling content or metering usage
suddenly went from viable and commercially attractive to insupportable and
economically naive. So along came the second major commercial model in the online
world: the advertiser-driven business model.
There were a variety of difficulties in implementing the advertising-driven model. For
example, determining appropriate CPM17 rates for Internet advertising (segmented
according to banners, buttons and interstitials); measuring traffic with integrity (which
included defining the meaning of hits, page views and unique users), and ultimately
estimating the efficacy of such messaging.
An example of how it might be able to generate more advertising -especially from non-
Internet businesses- can be found at AOL itself. Since it merged with Time Warner, a
magazine, movies and cable-TV group, AOL’s advertising has held up far better. In
large part, that is because AOL is now part of a diversified media conglomerate that
sells both offline and online advertising.

16
As I write this, an email pops up: “80% of dotcoms in San Francisco will shut down”.
http://ibrujula.com/news/noticia.php3?id=15377
17
Cost per Mile impressions of banners. Roughly, how much does it cost to buy 1,000 impressions.

20
Through mergers or alliances, it seems clear, dotcom companies will become
increasingly like bricks-and-mortar firms. In the process, they will also come to be
valued more like traditional companies -which in most cases means a sharp, downward
revision- even from the much-lower valuations to which they have sunk in the past year.
Yahoo! was rare among Internet firms in making a profit. This year, it may not. Yahoo!
is now trying to develop other sources of revenue, for instance by encouraging people to
take out subscriptions to certain services. But this effort is in its infancy and, to survive,
the company will have to rely on advertising. The logic of this is that Yahoo! also needs
a partner from the world of conventional media. Disney, Vivendi and Viacom have in
the past been suggested as possible partners. Viacom once said it might be interested in
acquiring Yahoo! at $15 a share. At the time this seemed laughable. At their peak
Yahoo!’s shares were worth $237. This week, however, the firm’s share price has fallen
close to the $15 which Viacom thought reasonable. Yahoo!’s current management is
fiercely independent and would probably resist such a takeover.
Back to the advertisement model: the dollars just did not come as expected. Many
research firms estimate that global online advertising is expected to grow at (roughly)
40%. Jupiter Communications and Emarketer anticipated about six months ago (a post-
crash estimation) a CAGR of 35%, while Forrester and the Myers group were a little
more optimistic (say 45%). In absolute dollars, we are talking about a 10 billion market
in 2001 for the online advertising market.
Three key factors conspire with the Yahoo advertising model:
The number of banner-supported web sites is growing much more than this 40%, so
competition is enormous.
This point is rather difficult to explain. Personally, I am afraid that there is a general
consensus between brick & mortar companies that banners are not the solution, and still
they are waiting for some advertising Next Big Thing.
As a great paradox, the best online advertising clients were... the dotcom companies
themselves. And they did extremely bad in the last year, so losses is what can be
expected in the future18

18
Online Advertising, Lehman Brothers, July 2000

21
 $10,200
Online Advertising Rev. (millions)
$10 ,000

$9,000 Dot -Com Traditional

Advertisers Advertisers
$8,000

$7,000
$6,100
$6,000
$8,515
$5,000

$4,000 $3,600 $4,120

$3,000 $1,620

$2,000

$1,000 $1,980 $1,980

$1,485

$0
1999 2000 2001

Online advertising was a poor fuel for many dotcoms. The silver bullet is the fact that
Venture Capitalist (VC) funding for pre-IPO startup dotcoms (such as content, B2B,
B2C, and ecommerce) collapsed from Q2/2000 to Q3/2000.19
All of these dotcoms had seen years of continuous increased funding. But now, they
have been abandoned, falling by more than a third. The B2B sector (business-to-
business) fell 38%. The B2C (business to consumer) sector fell the most: 41% drop in
funding. One may expect further drops in Q4 as VCs leave these sectors.

Why?
Dotcoms have no profits and few revenues
Dotcoms have high burn rates (the speed at which they use up their VC funding,
often at several million dollars per month)
They are funded entirely by VCs, and because VCs are pulling out of the dotcom
market.
The consequence is simple. Most of the dotcoms will go bankrupt very fast, very soon,
very hard.20 After 5 years of consistent growth, investment in Internet-related
companies declined. As a whole, Internet companies suffered an 11% decline in the
number of financing rounds and a 19% decrease in amount raised, but those focused on
infrastructure saw slight increases. While software/database investment declined only
mildly from its 3Q'00 peak, the remaining Internet sectors fared poorly. Investment in e-

19
See Nov 2000 PriceWaterhouseCooper's quarterly VC report, MoneyTree at
http://www.pwcmoneytree.com
20
Check the Wall Street Journal “Dot-Com Layoffs and Shutdowns” placed at
http://interactive.wsj.com/public/resources/documents/dotcomlayoffs.htm

22
commerce companies decreased 92% from its peak in 4Q'99 and now accounts for only
1% of Internet investment. Business services, which once attracted roughly half of the
Internet dollars, continued its steady decline in the fourth quarter, and is now at half its
Q'00 high.21
After advertising, e-commerce was considered the next valid model. The argument was
that a lower-cost channel structure resulting from the "disintermediation" of middlemen
such as distributors, wholesalers and bricks-and-mortar retailers could reward new
intermediaries (web-based retailers) with fatter margins.
However, the most celebrated of such virtual merchants, Amazon, managed to raise
more questions about e-commerce in many people's minds than it answered. For one
thing, Amazon.com did not disintermediate its channel because it depended critically on
existing physical book distributors. Moreover, Amazon spent so heavily on marketing,
brand awareness and technology that it has yet to record a profit despite achieving gross
margins of a healthy 19 %. Finally, Amazon.com expanded into the sales of non-book
items, with an apparent lack of regard for the underlying profitability of these new lines.
For example, the site sells music CD's at an average price of $13 while incurring costs
of $14 per unit. It is hard to make up those losses in volume. But there was a rationale:
build a customer base of loyal site users and profitability will follow. Some day.
Everyone can disagree about the future of Amazon. Maybe it can turn the corner to
profitability at any point given the heavy investments required to maintain its e-
commerce leads, marketing and technology. But, while skepticism about Amazon.com
may not be justified, a beady eye should surely be cast on many Internet startup
companies that have followed in its wake but with a twist.
So, now that we have made up our mind and took this post-crash perspective, it seems
pretty clear that these problems result from overwhelming marketing costs and and poor
management.
Again, there is no distinction here between New or Old Economies. There was always
something absurd about Yahoo! being worth more than the combined value of General
Motors, Heinz and Boeing. The real question now is: has the Internet produced, in the
likes of Amazon, Yahoo! and eBay, a new generation of firms substantial enough to
survive the bursting of the dotcom bubble? On their own, probably not. Hand-in-hand
with an old-economy partner, maybe.

21
PricewaterhouseCoopers' Tracy Lefteroff summed it up: "Internet is over. Biotech is hot. And, we
expect the momentum to continue this year."

23
Old Economy Revenge – A Manifesto

BERKSHIRE HATHAWAY INC.: ACQUISITION CRITERIA22

We are eager to hear from principals or their representatives about businesses that meet
all of the following criteria:
Large purchases (at least $50 million of before-tax earnings),
Demonstrated consistent earning power (future projections are of no interest to us,
nor are "turnaround" situations),
Businesses earning good returns on equity while employing little or no debt,
Management in place (we can't supply it),
Simple businesses (if there's lots of technology, we won't understand it),
An offering price (we don't want to waste our time or that of the seller by talking,
even preliminarily, about a transaction when price is unknown).
The larger the company, the greater will be our interest: We would like to make an
acquisition in the $5-20 billion range. We are not interested, however, in receiving
suggestions about purchases we might make in the general stock market.
We will not engage in unfriendly takeovers. We can promise complete confidentiality
and a very fast answer -customarily within five minutes-as to whether we're interested.
We prefer to buy for cash, but will consider issuing stock when we receive as much in
intrinsic business value as we give.
We frequently get approached about acquisitions that don't come close to meeting our
tests: We've found that if you advertise an interest in buying collies, a lot of people will
call hoping to sell you their cocker spaniels. A line from a country song expresses our
feeling about new ventures, turnarounds, or auction-like sales: "When the phone don't
ring, you'll know it's me."

22
Thesee lines may seem rather ironic to a New Economy reader.
Indeed, they are.
Paradoxically, this sort of technophobe old-fashioned capitalists have a web site:
http://www.berkshirehathaway.com/1997ar/acq.html

24
Further references

Check Jakob Nielsen’s essays (http://www.useit.com) in order to learn about Web

and Information Design.
Alfons Cornella Infonomia ezine. The best website about Infonomics, and one of the
top concerning Intenet issues in Spanish.
Howard Rheingold’s BrainStorms site.
“Information Desgin” by Robert Jacobson
“The Age of Spiritual Machines”, by Ray Kurzweil
“Profit Patterns” by Adrian Slywotzky and David Morrison.
“Out of control” by Kevin Kelly.

Thanks to...
Alfons Cornella, Kathy Foley, Mike Amigot, Sasha Chislenko and Jorge Grinberg for
their valuable support and inspiring articles.
Daniel Rodriguez Sierra for translation of some awful passages.
And Mario Kiektik, the first one who ever told me about Internet.

25