EN3515 Lecture 2: The Internet Industry: Success and Failures

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EN3515 Lecture 2 The Internet Industry Success
and Failures

• The Internet Industry Successes and Failures
• The Legends
• Types of Businesses in the Internet Economy
• The Major Financer of Internet Business
  Advertising
• Some interesting business models
• Current Successors
• The Less Fortunate

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The LegendsYahoo! And Jerry Yang (1)

• In 1994, Jerry Yang, a graduate student at
  Stanford University, compiled a list of favorable
  websites with his fellow student David Filo. This
  list soon became Yahoo!, one of the legendary
  Internet companies in the world.
• In 1999, the fourth quarter net income of Yahoo!
  quadrupled to US57,6 million, and revenues
  jumped from US91million to US201 million.

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The LegendsYahoo! And Jerry Yang (2)

• In 2000, the financial performance of Yahoo was
  strong. One of the few dotcoms that turn a
  profit, Yahoo's revenue more than doubled in the
  second quarter to 270.1 million from 128.6
  million a year earlier. Excluding
  acquisition-related charges and employer payroll
  taxes, Yahoo earned 74 million, compared with
  27.1 million a year ago.
• In 2001, it held a stock-market value of more
  than US70 billion.

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The LegendsYahoo! And Jerry Yang (3)

• In April 2001, Yahoo posted a US11.5 million
  first quarter net loss, compared with a profit of
  67.6 million for the same period in 2000. It was
  cutting 12 of its workforce.
• Revenues declined 33 percent to 182.2 million in
  the second quarter, from 273 million in the same
  period the previous year. And the company, once
  one of the Web's biggest money-spinners, says
  revenues for the full year will total between
  700 million and 775 million, down roughly by
  one-third from 1.1 billion in 2000.

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The LegendsYahoo! And Jerry Yang (4) Nasdaq
Yahoo! Stock Price 2001
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The LegendsYahoo! And Jerry Yang (5) Business
Model

• Search Engine/Portal
• Search
• News
• B2B
• B2C
• Communication (instant communication)
• Revenue
• 80 percent from advertising (not just banner ad,
  e.g. real estate)

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The LegendsAmazon and Jeff Bezos (1)

• In 1994, Jeff Bezos started his online book store
  from his garage. Within a few years, Amazon.com
  became the largest online e-commerce company and
  the biggest brand name of the Internet industry
  (still doing quite well).
• One fifth of the world Internet users and 70 of
  U.S. Internet users have visited this site.
• Compare the HK version http//www.yesasia.com

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The LegendsAmazon and Jeff Bezos (2)

• In 1999, the stock traded as high as 113.00 each
  share. Jeffs stock shares were worth about US7
  billion.
• In 2000, Amazon lost US1.4 billion. On September
  7, 2001, the share price went down to 8.51, a
  drop of 90.
• Now its going up again!

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The LegendsAmazon and Jeff Bezos (3) Nasdaq
Amazon.com Stock Price 2001
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The LegendsAmazon and Jeff Bezos (4)
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The LegendsAmazon and Jeff Bezos (5)

• Stock Price (9/7/01) 8.51
• 1Week  -4.8
• 4 Weeks  -14.5
• 13 Weeks  -45.8
• 52 Weeks  -80.2

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The LegendsAmazon and Jeff Bezos (6)

• Fiscal Year-End December2000 Sales (mil.)
  2,762.001-Yr. Sales Growth 68.4Employees
  9,000Revenue per employee 306,888.89

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The LegendsAmazon and Jeff Bezos (5) Business
Model

• B2C Vertical Retail
• Books
• CDs, VCDs, Records (expanding)
• Expanded to B2C Horizontal Retail
• Cars
• Home improvement
• Almost everything else
• The Web site design (interaction!!)

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The LegendseBay and Pierre Omidyar (1)

• eBay Incorporated. The principal activities of
  the Group are to provide personal online trading
  to a web-based community and offline traditional
  auction services. In a web-based community,
  buyers and sellers are brought together in an
  auction format to trade personal items such as
  antiques, coins, collectibles, computers,
  memorabilia, stamps and toys. As of March 1, 2001
  the Company operated dynamic pricing online
  trading platforms in the United States, Germany,
  the United Kingdom, Australia, Japan, Canada,
  France, Austria, Italy and South Korea.

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The LegendseBay and Pierre Omidyar (2)

• It all started in 1995 when Pierre Omidyar, a
  young technical graduate, built a website to let
  people auction off their items.
• By the end of 1999, eBay was the most visited
  e-commerce site on the Internet, surpassing
  Amazon. Net income more than tripled to US1.35
  billion in the third quarter of 1999. Registered
  members grew to 7.7 million. Its stock was as
  high as US117.

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The LegendseBay and Pierre Omidyar (3)

• On September 7, 2001, the stock price went down
  to US52.95.
• During the first quarter of 2001, eBay reported
  earnings per share of 0.08. This is an increase
  of 700 versus the first quarter of 2000, when
  the company reported earnings of 0.01 per share.
  

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The LegendseBay and Pierre Omidyar (4)
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The LegendseBay and Pierre Omidyar (5)Business
Model

• Trading platform
• Charging for membership fees
• Charging commissions
• Conducting own auctions
• Build you small e-stores (a lot of HK retailers
  do that)

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The LegendseBay and Pierre Omidyar (5)

• eBay reports profits by product line. During
  2000, the itemized operating profits at all
  divisions were 34.99 million, which is equal to
  8.1 of total sales. Of all the product lines,
  Online Services had the highest operating profits
  in 2000, with operating profits equal to 9.8 of
  sales. (This product line is the largest at eBay,
  and accounted for 91 of sales in 2000).

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Types of Internet Businesses (1)

• Internet Content Providers (ICPs, most of the
  media organizations and some horizontal portals,
  http//www.cnn.com/, and most porno sites Prvt,
  http//www.prvt.com/flash/start.asp)
• Internet Service Providers (ISPs, infrastructure
  businesses)
• Internet Data Centers (ICDs, data storage and
  processing services, such as sunnyvision)

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Private Media Group (PRVT.com)
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Types of Internet Businesses (2)

• Application Service Providers (ASPs, mostly
  software application providers,
  http//asp.thelist.com/list.asp)
  http//verticalNet.com/solutions/
• B2B trading portals and platforms (some are
  vertical, http//chinese.mediachina.net/chinese/in
  dex.jsp, http//www.easelink.com/index.asp and
  others are horizontal, http//www.8848.net)
• (http//www.activmediaresearch.com/online_success_
  strategies_in_b1.html) (http//www.activmediaresea
  rch.com/magic/pr032001.html)
• (http//www.ahk-china.org/china-economy/internet-b
  2b-right-on-the-cross.htm)
• B2C Retail (online stores, garage sales, factory
  outlets, etc. http//amazon.com, )

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Types of Internet Businesses (3)

• Services on line (travel, http//www.ctrip.com/ind
  ex.asp, http//www.travelocity.com/
• stock, http//etrade.com/, medical care)
• Hardware Providers (e.g. Cisco)
• Software Providers (e.g. Microsoft, Macro Media,
  Adobe)
• Instant Message (IM, e.g. ICQ, Yahoo, Microsoft,
  AOL)
• Email providers

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Some interesting examples

• Buy.com (revenue from advertisement)
• HKgolden.com
• Priceline.com (HK also has a site, .hk)
• Bestbuy.com and walmart.com (now think, how about
  the fortress.com.hk??)
• Fatwallet.com and dvdtalk.com
• Expedia.com and Travelocity.com, also
  eztravel.com.tw (now compare the Wingontravel.com
  and hongthai.com)
• Ebay.com HK retailers

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Other creative examples

• http//www.kland.com.tw
• http//www.webbyawards.com/
• Read weekly http//www.wired.com and
  http//www.slashdot.org
• Top 100 Web sites http//www.pcmag.com/category2/
  0,4148,7488,00.asp

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GMS SMS Growth (1)

• More than 50 billion SMS (Short Message Service)
  text messages were sent over the world's GSM (TM)
  networks in the first three months of 2001. These
  figures confirm sustained global consumer
  interest in text communications with networks on
  track to exceed GMS Association's forecast of 200
  billion global messages during 2001.(GMS
  Association, London, UK 25th MAY 2001)

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GMS SMS Growth (2)

• Mobile Lifestream estimated that the number of
  short messages will reach 40 billion per month in
  the world, of which
• 24 billion in Europe
• 5.6 billion in Asia
• 4 billion in North America

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GMS SMS Growth (3)The case of UK

• The Mobile Data Association announced in May 2001
  that over 900 million text messages were sent
  throughout the UK during April 2001. The total
  number of chargeable person-to-person text
  messages sent across the four UK GSM network
  operators in April was 900 million, compared with
  375 million sent in the same period last year.
• (Mobile Lifestream, 22 May 2001)

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SMS Growth (4)The Case of China

• In China, short messages have grown rapidly.
  Although there are no authoritative statistics on
  the total amount of the messages, there are
  indications of a tremendous increase in the use
  of short messages. Most people would receive or
  send several short messages (mostly political
  satire and jokes) each day. Sohu and Netease both
  provide short messages through China Mobile.
  Obviously, communicating though short messages
  has become a popular form of entertainment/communi
  cation in China.

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SMS Growth (4)Trend Analysis

• Evidently, SMS has become an increasingly popular
  form of wireless communication in the world.
• The growth will slow down only when GPRS and 3G
  are well established. However, that will take
  several years.

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SMS Growth (5)Trend Analysis

• Weaknesses of current SMS 1) mostly one way
  (although a mediating software application is
  being developed in China to make it
  quasi-interactive) 2) inputting messages is
  fairly difficult, especially on the mobile phone
  3) when done across cultures, it cannot overcome
  the language barrier 4) because of those
  limitations, SMs are mostly for entertainment or
  greetings.

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SMS Growth (6)Trend Analysis

• An idea to take advantage of this trend a
  multilingual WAP easymail (with user selecting
  and/or inputting only the key words).
• Really think about why people use SMS (e.g.
  American culture, Asian culture..etc.)

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Paid E-mail (1)

• Paid e-mail services may become a trend in the
  near future. They been considered and flirted
  with by the major players in the e-mail game,
  including Hotmail and Yahoo Mail.
• In China, several e-mail providers, including
  263, 163 and 21cn have launched paid services.
• Users acceptance one survey in China found that
  31 respondents are willing to pay a small fee
  for a better and more sophisticated service
  10.3 have no opinion and 58 say no.

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Paid E-mail (2)Trend Analysis

• Chargeable e-mail services are probably
  inevitable because of the hefty costs in the
  provision of free lunch. They are also the
  most feasible and acceptable of most of the
  Internet services. However, e-mail as it is may
  not warrant undisputed charges. Better, more
  secured and more value-added services should be
  provided.
• The multilingual easymail, mentioned in SMS
  Growth (6), may be a good value-added and
  indispensable service after people are hooked up.

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The Major Financer of Internet Business
Advertising (1)

• Internet advertising has witnessed a robust
  growth over the past few years. In 1999,
  according to the US Internet Advertising Bureau,
  advertising revenue on the Internet in the world
  was US4.62 billion. It was predicted to reach
  US45.55 billion in 2005. However, as the bubble
  of the Internet burst in 2000, the pace of growth
  slowed down -- despite a net increase.
• (Economic Journal, July 23, 2001, p.22)

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Internet Advertising (2)The case of the United
States

• Internet advertising in the United States
  recorded 2.2 billion in revenue for the fourth
  quarter of 2000, bringing the total online
  revenue for the year to 8.2 billion. While the
  2.2 billion shows an increase of 9 per cent over
  the 1.986 billion for the third quarter of 2000,
  the percentage increase is markedly lower than
  historical levels, and it is reflective of the
  overall slowdown in ad revenue across all media
  sectors, in addition to a higher revenue base.

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Internet Advertising (3)The case of the United
States

• General Motors spent the most on online media in
  2000, with an estimated 47.9 million
  expenditure. That almost doubles the 24.4
  million the company spent in 1999, according to
  CMR figures.
• Microsoft ranked second in 2000 ad spending, with
  25.5 million, followed by BankOne (25.5
  million), IBM (24.3 million) and ATT (18.5
  million). Only GM and ATT increased their
  expenditure from 1999. Microsoft, BankOne and IBM
  reduced their spending by 31 percent, 3 percent
  and 24 percent, respectively.
• (INTERACTIVE ADVERTISING BUREAU, April 23, 2001)
  

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Internet Advertising (4)The case of the United
States

• The categories which lead online spending during
  the fourth quarter of 2000 were
• Consumer-related (32) - year 2000 (31)
• Computing (21) - year 2000 (18)
• Financial Services (13), - year 2000 (14)
• Business Services (6), - year 2000 (9)
• Media (9) - year 2000 (8)
• (INTERACTIVE ADVERTISING BUREAU, April 23, 2001)
  http//www.iab.net

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Internet Advertising (5)The case of the United
States

• Overall, companies in media and advertising --
  which include portals, content sites and search
  engines -- spent the most on Web media of any
  sector, with 542.2 million spent in 2000, up by
  83.4 percent from 1999. Retail and e-tail firms
  spent about 73.6 percent more in 2000, or about
  510.9 million, while computers and software
  businesses (445.7 million a 29.5 percent
  growth) and financial concerns (294 million
  36.8 percent growth) also showed an increase in
  spending.
• (Competitive Media Reporting, February 6, 2001)

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Internet Advertising (6)The case of China

• Internet advertising saw a jump start in China.
  In 1999, advertising expenditure in Beijing,
  Shanghai and Guangzhou was RMB31.69 million.
  However, the growth rate has been slower than
  that in the United States.

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Internet Advertising (7)Trend Analysis

• The Internet can be seen as serving two
  functions as an industry (or business), and as a
  communication medium. As an business, it has not
  fared well, as evident in the recent recession.
  However, as a communication medium, it has been
  very successful, reaching more and more people
  (while fragmenting them). Therefore, advertising
  on it is appealing to advertisers. The question
  is Where to advertise, which heads to reach, and
  how the effect can be assessed?

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Internet Advertising (8)Trend Analysis

• As portals and websites get consolidated, and as
  the presentation of online advertisements
  improves, the Internet may serve as a good, if
  complementary, medium for advertising along with
  the traditional mass media. What it has
  experienced was also encountered by radio and
  television in their early years (although the
  later enjoyed a monopolistic position because of
  the limited airwave resources).

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Who Has Made It for the Moment?

• Hardware providers
• Software providers
• Some ISPs
• Increasingly ASPs (VerticalNet)
• Porno sites (for content providers)
• Travel (for services on line)
• Some B2C (amazons vertical operation)
• Auction platforms (ebay)