Slide2: Get Big Fast Promise and Peril on the Path to the Evernet


Monster.com Value Proposition: Monster.com Value Proposition Job seeker Lots of jobs Better information Sort and search Resumé online Free Recruiter Lots of job seekers, including “passive” candidates Fast cycle time $295 to post job (vs. $20,000+ in Boston Globe)


Monster.com Strategy: Monster.com Strategy Clerk to CEO career management Long-term goal: capture headhunters’ 33% fee Protect vertical markets Expand globally: now in 10 countries “Get Big Fast” to exploit network effects Leverage TMP Worldwide client base Spent 40% of revenue on marketing $100 million, 4 year exclusive contract with AOL Super Bowl ads; Olympic sponsorship; blimps!


Monster.com Metrics: Monster.com Metrics 8 million resumés; 500,000 job postings 50%+ of time and money spent on online recruitment $435 million in 2000 revenue 24% operating margin in 4Q ‘00; 40%+ projected over long term Monster = 80% of TMP Worldwide’s $4 B market cap


Boo.com: Boo.com Online sportswear retailer serving Europe and North America Co-founders: two 29-year-old Swedes Raised $135 million from Group Arnault, Benetton family, Goldman Sachs, J.P. Morgan At peak, staff of 400 in Carnaby Street, London headquarters and offices in New York, Stockholm, Paris, Amsterdam, and Munich


Boo.com Strategy: Boo.com Strategy Full-priced retailer of hip, high-end sportswear Operating in 7 languages, 18 countries, and multiple currencies 5 day free shipping anywhere in Europe or North America Very sophisticated website Avatar (“Miss Boo”) providing product information and recommendations Virtual mannequins; 360° rotation


Boo.com: Hype Gone Haywire: Boo.com: Hype Gone Haywire Missed May 1999 launch date by 6 months due to technical problems (e.g., supplier system integration) Despite delay, spent $25 million on pre-launch publicity Upon launch, technical problems persisted: high-bandwidth connection, latest browser required Sales: $680,000 in first 3 months, including Christmas Focus shifted to discounting, to no avail Bankrupt in May 2000 Now part of Fashionmall.com


Current Popular View: Current Popular View Internet gold rush was fabricated by foolish speculators, greedy VCs and bankers, and callow entrepreneurs Get Big Fast strategies were inherently flawed As failures mount, everyone’s getting exactly what they deserved!


Another view …: Another view … It’s true that dot coms were overvalued due to speculative excess in capital markets Also true that many were funded without a clear view of how/when they’d make money But just as overreaction marked the Internet’s rise, the popular view of its precipitous decline is oversimplified and too extreme


Another view, continued: Another view, continued The Internet isn’t going away We’re not dealing with tulip bulbs We’re 7 years into a 20 year process of networking the world economy Failure is normal with new businesses 60% of all startups fail One-third of VC-backed firms fail


Another view, continued: Another view, continued Along with failures, we’ve seen some brilliant successes: e.g., Monster, AOL, Yahoo!, eBay, CNET, RealNetworks, E*Trade, Amazon BMV, Homestore, Travelocity Get Big Fast strategies are: Not always flawed Not new Not unique to the Net Not going to disappear


Get Big Fast (GBF) Strategy: Get Big Fast (GBF) Strategy Massive upfront investment in brand building and customer acquisition Products/services often free or deeply discounted Examples: Amazon.com; AOL; E*Trade; eToys; iVillage; Netscape; Priceline


Focus Versus Promiscuity: Focus Versus Promiscuity Breadth of customer segments Breadth of product line Vertical integration Business model “hybridization”


Why are incumbents so often reluctant to pursue Get Big Fast strategies?: Why are incumbents so often reluctant to pursue Get Big Fast strategies? How valid are explanations for inertia? Concerns about cannibalization Concerns about stock price impact of GBF losses Slow, dysfunctional resource allocation processes What organizational/financial structures maximize incumbent’s success odds with GBF strategies? Tracking stocks/spinoffs Organizational separation versus integration


Get Big Fast When …: Get Big Fast When … “Winner-take-all” dynamics apply Network effects (i.e., “viral”) Scale economies (i.e., “scalable”) Customer retention (i.e., “sticky”) And, competitive risks are “reasonable” And, lifetime value of customer exceeds acquisition cost And, you can fund aggressive growth


Internet Business Models: Internet Business Models Infrastructure Access providers (e.g., Earthlink, Comcast, DoCoMo) Networked utilities (e.g., RealPlayer, Acrobat) Portals (e.g., Yahoo!) ASPs (e.g., USInternetworking, Corio) Destinations Content providers (e.g., CNET, WSJ.com) Retailers (e.g., Amazon) Brokers (e.g., E*Trade, Carpoint, Homestore, Travelocity) Market makers (e.g., eBay, Monster, Covisint)


The Evernet: The Evernet “I think we’re now quite early in the building of the Evernet, this always-on, high-speed, ubiquitous, multiformat Web. There are really six Webs, and only one of them is deployed now—that’s the PC Web. And last I checked there were only 180 million users of it out of six billion people on the planet. Then there’s the voice Web, and I mean literally voice, as in Tellme. There’s the hand Web for handheld devices like Handspring or Palm, There’s this broadband Web, where by the end of the year seven million U.S. homes will be getting ten megabits of two-way Internet access for $30 or $40 a month. There’s also the video Web, which you can see in the video servers from TiVo, Replay, and Geocast. And finally there’s the eWeb, which is machine-to-machine communication. So I think there will be just as much innovation in the next ten years as there has been over the past few.” John Doerr, Fortune (11/27/00)


Infrastructure businesses remain in flux: Infrastructure businesses remain in flux Which access technologies will succeed? Fixed access: cable vs. DSL vs. fixed wireless vs. satellite Mobile access: WAP vs. voice recognition; 802.11b vs 2.5 vs. 3G; PDA vs. cell phone vs. laptop Interactive TV: local caching (TiVo) vs. server-based Who’ll develop portals for new access technologies? Access providers (e.g., cable operators; wireless carriers) Incumbent Web portals (e.g., AOL, MSN, Yahoo!) Equipment providers ( e.g., Palm) Startups (e.g., Tellme; TiVo) Who’ll own standards for new networked utilities? Adobe vs. Microsoft for eBook readers Groove vs. others for peer-to-peer enterprise software


Destination businesses are maturing: Destination businesses are maturing Landgrab is over; winners are clear in most categories Exceptions: music; brokers facing disintermediation (auto, travel, insurance); consortia launching B2B exchanges New access technologies unlikely to change outcomes There are some pure plays winners, but incumbents have big advantages and momentum Content, retailing have seen the worst pure play shakeouts The Empire Strikes Back: brokers, B2B market makers Path to profitability: pricing; product pruning; retention marketing; consolidation; international expansion


Two Types of Network Effects: Two Types of Network Effects Connectivity-based (e.g., fax; railroads) Chat; instant messaging Workgroup collaboration Auctions; classifieds; B2B exchanges Multiplayer games; MP3 sharing Software supply-based (e.g., Playstation; Shockwave; eBooks)


Strength of Network Effects: Strength of Network Effects Determined by: Exclusivity Heterogeneity of demand and supply Sensitivity to aggregate participation Costs and risks of participation Ability to isolate segments Strength varies by business model Weak: ISPs, content providers, retailers, most ASPs Moderate: portals Strong: networked utility providers, market makers


Scale Economies: Scale Economies Cost elements Fixed : content production; website development Semi-fixed : direct sales force; G&A Variable: transmission/hosting; merchandise; fulfillment; customer service Contribution margins vary by business model Retailers, ASPs: 20% ISPs: 33% Brokers: 50% Portals, content providers, market makers, networked utility providers: 85%+


Determinants of Customer Retention Rates: Determinants of Customer Retention Rates Network effects Competitive differentiation Switching costs Hassles opening/closing an account Retraining costs Data reentry Reintegration of information systems Forfeiture of transaction profile Disruption of “mission critical” activities


Retention Benefits and Boosters: Retention Benefits and Boosters Retention benefits Word-of-mouth referrals Related sales (have data to cross-sell) Price premium? Retention boosters Personalization Community Investments in data entry, user ratings Push e-mails Loyalty programs


Slide31: “Marketing on the Net is like teenage sex. Everybody claims they are doing it. Those who aren’t, lie about it. Those who are, aren’t very good at it.” Jim Roots, Dir. Interactive Business, Sears Forrester, Retail Strategies, 10/98


Retention Rates Vary By Business Model: Retention Rates Vary By Business Model Low Content providers (few subscriptions) Retailers (limited basis for differentiation) Moderate Portals (chat and IM; personalization) High Access providers (hassles changing email or phone #, waiting for cable guy) Networked utilities (network effects, registry settings) ASPs (system integration, employee training) Market makers (network effects, user ratings, system integration, employee training, etc.)


Winner Take All?: Winner Take All?


“Reasonable” Competitive Risks?: “Reasonable” Competitive Risks? Full frontal assault on entrenched market leader (e.g., Disney’s Go.com) Wars of escalation and attrition (e.g., online pet supply retailing)


Great Minds Think Alike …: Great Minds Think Alike … Pets.com; Petsmart.com; Petstore.com; Petopia.com; Allpets.com; etc. Drugstore.com; PlanetRX; Soma.com; etc. Furniture.com; FurnitureFind.com; EZShop; Living.com; Ethan Allen; Simplymodern; etc.


International markets are inherently more competitive: International markets are inherently more competitive U.S. players join local startups and incumbents Local players, including incumbents, have witnessed GBF dynamics in U.S. Incumbents often less constrained by capital markets (e.g., family ownership may facilitate risk taking) As a result, incumbents are often more aggressive (e.g., Telefonica; Bertelsmann)


Lifetime Value of a Online Brokerage Customer: Lifetime Value of a Online Brokerage Customer Average customer’s annual revenue = $600 Contribution margin = 50% Average customer life = 10 years (= 1/(1-x) where x = annual retention rate of .90) Discounted present value (at 10%) = $1,500, net of $300 acquisition cost Assumes no degradation of revenue due to competition Reflects no upside from cross-selling other services


Phases of Investment Manias (Kindleberger): Phases of Investment Manias (Kindleberger) Euphoria Overtrading - Entrants fight wars of escalation and attrition - Early movers expand scope to exploit/sustain valuation Revulsion - “Babies out with bathwater” - Opportunities for those with cash, courage


Get It Right First When…: Get It Right First When… Protecting quality/brand is paramount “Learning by doing” is important


Get It Right First?: Get It Right First?


CNET’s Strategic Decisions: Focus or Promiscuity?: CNET’s Strategic Decisions: Focus or Promiscuity? Breadth of customer segments served? Technology enthusiasts and IT professionals versus “technology influencers” Product line diversification? Other categories with complex purchasing decisions, e.g., autos, financial services Vertical integration? Sell Snap! to NBC? Business model “hybridization”? Now: content provider, vertical portal, and online broker Become an online retailer?


“We have not succumbed to the frenzy of doing a bunch of $40 million deals with search engines and trying to acquire customers at any cost … say it’s going to be 15% of the market in 5 or 6 years – do we literally tank the company to go out and build share in that business?” DiRomualdo, Borders’ CEO, 9/21/98, Forbes: “We have not succumbed to the frenzy of doing a bunch of $40 million deals with search engines and trying to acquire customers at any cost … say it’s going to be 15% of the market in 5 or 6 years – do we literally tank the company to go out and build share in that business?” DiRomualdo, Borders’ CEO, 9/21/98, Forbes % change in stock price, Apr. 97 - Apr. 01 Barnes and Noble: +27% Borders: -21%


Slide44: “I think of them [dot-coms] as fireflies before the storm – all stirred up, throwing off sparks. Maybe one or two of them will be profitable. The storm that's arriving – the real disturbance in the force – is when the thousands and thousands of institutions that exist today seize the power of this global computing and communications infrastructure and use it to transform themselves. That's the real revolution. Amazon.com is a very interesting retail concept, but wait till you see what Wal-Mart is gearing up to do.” Lou Gerstner, CEO of IBM, 5/99


Slide45: “If you are an existing business, probably the best thing you can do is have a fire and start over again.” Robert Levitan, co-founder iVillage and Flooz CNET News.com, 10/8/99


Incumbent Retailers’ Advantages: Incumbent Retailers’ Advantages Shop online, buy at store (and vice versa) Base for delivery (to store or home); base for returns Brand reputation and existing customer relationships, data on customer preferences Promotion avenues: coupons, signage, kiosks Economies of scale: purchasing, advertising, For catalog retailers: leverage existing fulfillment and customer service operations


Why are incumbents often slow to the Web?: Why are incumbents often slow to the Web? Fear of cannibalization Fear of stock price impact Legacy information systems Inherently conservative, sometimes dysfunctional, “bottom up” planning processes Process is conservative: capital proposals are funded when GMs stake their reputations after checking project’s fit with firm’s established strategy Process is slow: requires vertical information exchange and horizontal coordination Defensive rationalization yields cycle of failure


Issues Facing Incumbents: Issues Facing Incumbents GBF? Pursue Existing or New Customers? Separate or Integrate? Build or Buy? Partner with Competitors? Spin Off Dot Com?


Dimensions of Structural Separation/Integration: Dimensions of Structural Separation/Integration Organizational decisions Reporting relationships Physical location Staffing Equity ownership Operational decisions Market positioning Coordination of front- and back-office policies and activities (e.g., pricing, product selection)


Separate or Integrated?: Separate or Integrated?


It’s rough out there!: It’s rough out there! “The bottom line for me is I fail, like, let’s say six months after I launch the company. I just absolutely fail. So what’s going to happen? I’m going to apply to business school and have an incredible application.” Joseph Park Kozmo.com co-founder Vanity Fair, 12/99


“The state of the Web today is like 10 milliseconds after the Big Bang. The laws of physics are in place, but no-one knows exactly how this universe will expand. We do know its going to be a big deal for a long time.” John Doerr, Kleiner Perkins Fast Company, Feb. 97 : “The state of the Web today is like 10 milliseconds after the Big Bang. The laws of physics are in place, but no-one knows exactly how this universe will expand. We do know its going to be a big deal for a long time.” John Doerr, Kleiner Perkins Fast Company, Feb. 97


The Burgess Shale: The Burgess Shale “This is like the Cambrian explosion 550 million years ago, when multicelled life first appeared on the scene. It was the greatest speciation ever seen, but it was also — which people forget — the greatest rate of extinction ever seen. We’re going to see all kinds of ideas tried, and the majority of them are probably going to fail.” Jeff Bezos, CEO Amazon.com (Business Week, 9/13/99)


Slide54: Opabinia attacking upside-down Hallucigenia