eBusiness: The Hope, the Hype, the Power, the Pain
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(© Jack M. Wilson,
1999, 2000) |
The Players of eBusiness
Folks, they say that if you want to be a leader, find a parade and get in front of it. –Jim Barksdale, CEO Netscape.
Nobody is more surprised than me by what has happened over the last four years. –Jeff Bezos, CEO of Amazon.com [Business Week]
Any identification of the players
of eBusiness must be selective and will change with time. We will identify a few key players that are
intended to illustrate the diversity of approaches and include both new and
long established companies, but with an emphasis on the newer companies that
have pioneered the new business models.
In this section, you will be introduced to those companies that will be
discussed again and again in different contexts as we proceed through the
course.
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Because the performance of these players was so very different than the rest of the market, Fortune introduced the Fortune e-50 to track the performance of the new economy companies. Within this group they identified companies as E-Companies, Software and Services, Net Hardware, and Net Communications. The E-Companies ranked by revenues are shown in table 2-1. The oldest of the 19 eBusinesses is AOL, which was founded in 1985! The Information Week 100 is another interesting index of eBusinesses. We will return again and again
to several of examples selected both from this list and from others of
interest. Among these will be : · Netscape · America On-Line · Yahoo · Amazon.com · Ebay · ENRON · E*Trade · IBM · Microsoft In this chapter the cast of characters will be introduced briefly and several abbreviated case studies selected to illustrate issues and to form a base for more detailed consideration in other chapters. |
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Netscape
The University of Illinois National Center for Super Computing Applications has been an effective incubator for new ideas in computing, but the most important idea ever developed there came from a student, Marc Andreessen. Andreessen and his friend, Eric Bina, developed the idea for a program that could be used to browse the new World Wide Web, recently developed by Tim Berners-Lee at CERN (The French initials for the European Center for Nuclear Research). Dubbed Mosaic, this new program quickly spread throughout the scientific and university world. Without Mosaic, the World Wide Web was an inaccessible and idiosyncratic system for the scientific intelligentsia. With Mosaic, the Web quickly became accessible to anyone with a computer and network connection.
Because Andreessen was a student working on a university project, the University of Illinois maintained control over the intellectual property embodied in Mosaic and went about setting up a company to license the technology as universities have often done. Andreessen graduated and headed out to Silicon Valley to seek his fortune.
He was surprised that one of the most famous persons in Silicon Valley< Jim Clark, sought him out to talk. Clark was a successful entrepreneur in Silicon Valley who left Stanford to found Silicon Graphics and build it into both a business and technical success. To the engineers in Silicon Valley, Clark was both a legend and a hero. He never deserted his roots in engineering and much preferred hanging out with the engineers rather than the business leaders. This behavior and other eccentricities did not endear him to the business community, which viewed him with a mixture of awe and distrust.
Clark had found himself pushed out of the real leadership at Silicon Graphics and was convinced that they were on the wrong track. Frustrated by his inability to influence the leadership at Silicon Graphics, Clark was looking for the next big thing. He thought that Andreessen might just be the key to finding it. At first, Andreessen professed no interest in doing anything to follow on Mosaic. That was just fine with Jim Clark, because he was thinking of doing something related to interactive television. Then one day, while Clark and Andreessen were talking in Clark’s kitchen, Andreessen proposed to build a Mosaic killer. Clark was quickly convinced and became one of the first Internet evangelists! The code name for the product became Mozzilla, short for Mosaic killer and reminiscent of Godzilla! They named their newly formed company Mosaic Communications, but that ran afoul of the intellectual property rights of the University of Illinois and the company was re-christened Netscape and incorporated on April 4, 1994.
Shortly after the founding of Netscape Andreessen observed: "If the company does well, I do pretty well. If the company doesn't do well... [in despair] I work at Microsoft." Andreessen never had to work at Microsoft.
Netscape pioneered many of the actions that became hallmarks of the early eBusinesses. Among those were:
- Going public early in the company’s history prior to developing a history of revenues and earnings.
- Focusing on growing the customer base rather than developing a revenue model.
- Giving away the product to build a user base.
- Using publicity and media hype to drive investor interest in the companies stock.
- Using the highly valued stock as currency to acquire related businesses.
Netscape did an IPO far earlier than most start-ups at that time. They offered 5,000,000 shares of common stock while retaining 33,161,444. Of the remainder James H. Clark had 9,340,000 (28.2% 24.5%), James L. Barksdale, the CEO, received 3,840,000 (11.6% 10.1%), L. John Doerr, the venture capitalist had 4,400,000 (13.3% 11.5%), and Marc L. Andreessen ended up with 1,000,000 shares (3.0% 2.6%). This was one of the first large IPO’s in which the engineers ruled and the venture capitalists went along for the ride.
Netscape did not articulate a clear strategy for growing revenues and earning, although the core of the business model was to essentially give away the browser while profiting from sales of servers and services. Mark Andreessen himself admits: “When we started Netscape, we basically had an idea. We weren’t exactly sure what kind of a business we’d build around it or if it would be a long lived company.” Perhaps serendipitously, the Netscape URL became one of the most popular portals on the Internet. So many people visited it each day that, because of Metcalf’s Law, it became a valuable property in it’s own right. At the time of the Netscape acquisition by AOL, this Portal was one of the most highly valued components. Interestingly, the browser, with which it all started, was perceived to have such a low value that it was not even acquired by AOL, but instead spun out into a semi-public group.
Netscape’s story become inextricably intertwined with Microsoft’s when Microsoft Chairman, Bill Gates, pronounced that the future was the internet and that Microsoft intended to be a big part of that future. Microsoft developed the Internet Explorer Browser as a direct competitor to Netscape and a business rivalry developed that hardened into a bitter feud. Eventually, Jim Clark, joined by others in the industry, complained to the justice department about Microsoft tactics and the anti-trust case began which led to Judge Thomas Penfield Jackson declaring Microsoft guilty of unfair and illegal competition.
Netscape did not survive the competition. Unable to develop a realistic model for increasing revenues or developing earnings and losing market share to Microsoft’s Internet Explorer, Netscape agreed to be purchased by America On-Line in November of 1998. The value of the purchase was $4.2 billion and was fully a stock transaction with each shareholder of Netscape receiving .45 share of AOL. A key element of the sale was the addition of Netscape’s 20 million daily visitors to its web site Portal to the 14 million AOL subscribers, potentially creating the largest network in the industry.
Further development of Netscape’s Navigator and Communicator browser products was covered in a separate but simultaneous deal with Sun Computer. Sun and AOL agreed to cooperate on the development and use products and services from one another. AOL agreed to incorporate Java as a core technology and buy $500 million of products and services from Sun. Sun agreed to pay AOL $350 million in licensing fees and for advertising and marketing services. Sun and AOL also agreed to collaborate on the development of a suite of tools to enable enterprise level eCommerce, now known as iPlanet. The Sun Netscape Alliance released the first iPlanet products in August 1999.[1]
Although Netscape never did build a viable business that could spin off reliable earnings and survive on it’s own, it was very successful in creating shareholder value and bringing a rich return to it’s founders and early investors. Viewed as a product and a business, Netscape might be termed an unfortunate failure. Viewed as an investment, it was a great success for the early investors. Viewed as the prototype for an Internet generation of new eBusiness, Netscape was the premier pioneer.
America On-Line (AOL)
“With the World Wide Web giving ‘content providers’ a way to reach millions of consumers directly, who would need AOL?” asked Business Week in 1996.[2] In January 2000, that question was answered by Time-Warner when it agreed to be acquired by AOL for $184 billion in stock. The merger highlighted the difference between the old economy companies represented by Time-Warner and the new economy company typified by AOL. In the end AOL owned 55% or the resulting company to 45% for Time Warner. This split in favor of AOL was in spite of the fact that Time Warner dominated the revenues, bringing 80% to Time Warner’s 20% ($23.5B, 5.25B). Time Warner’s assets were $48.4 while AOL assets only came to $6.5B. The more important factor was that AOL had approximately 4.4 times the regular users as Time Warner and that gave it a network economics valuation of 20 times that of Time-Warner according to Moore’s Law.
Time Warner was one of the nations greatest media companies or content providers. It included such brand names as Time magazine, Warner Brothers, Sports Illustrated, People, HBO, and CNN. Time Warner had also initiated the Road Runner Cable Internet access system, but it had fundamentally failed to transform itself into a viable competitor in the Internet space.
In order to take on this acquisition, AOL had to take on Time Warner’s 17.8 billion in debt, a significant change from the $341 million in debt that AOL had at the time of the merger.[3] AOL also boasted a net margin of 16.6% versus Time Warner’s 5.1% of revenues. The market did not appear to immediately appreciate the merger. The steady decline that AOL had been experiencing since it’s mid December high of $ 95 continued at the same pace throughout the following month after the January 10th announcement eventually reaching bottom at about $ 50 in late February. A March rebound was followed by an April slump that eventually left AOL in the $50-60 range.
AOL had come a long way from the problems of the middle of the 90’s when it had variously been described as “America Off-Line” and “America On-hold” as they struggled with the growing pains of providing for over 50 million regular users who spent of 10 billion dollars on AOL in 1999.[4]
Steve Case founded AOL, headquartered in Dulles, Virginia in 1985 as one of the first on-line services. It was too early to call them an Internet Service Provider (ISP), which is what they have become. AOL was born from the ashes of Control Video and re-christened Quantum Computer Services, an on-line service for Commodore computer users. It was renamed America On-Line in 1991. Case was an unlikely leader for a technology company as he had been a marketer for Proctor and Gamble following his graduation from Williams College.
It was at this point that AOL faced one of it’s largest challenges, how to adapt an on-line service that predated the Internet on to the Internet. Many thought that they were sure to fail. Instead they succeeded. Then in 1993, Case announced a growth at any cost strategy that was a high-risk “bet the company” kind of strategy. Once again the pundits feared failure. The resulting growth did lead to huge problems with customer service and lots of bad press, but AOL eventually overcame the problems and went on to dominate its competition. One by one, CompuServe, Prodigy, and others succumbed to AOL’s network dominance.
AOL has always been the mass-market provider and was often denigrated for that demographic role. A 1996 Business Week article[5] suggested that:
“’The secret of Case is that he has figured out a way to make consumers like their computers,’ says Eric E. Schmidt, vice-president and chief technology officer at Sun Microsystems Inc. ‘Look at AOL's customer base--it's normal people, it's consumers.’ Indeed, AOL was so successful in dumbing down technology that for years, rivals and pundits dismissed the service as the ‘Kmart network.’ Says Schmidt: ‘It was extremely arrogant of the high-tech industry to criticize that.’
AOL simply drove that mass-market appeal into the largest network of users on the internet. Through Metcalf’s Law that network brought market value to the stock and that market value let AOL make the strategic acquisitions such as Netscape and Time Warner.
Yahoo
What happens when two electrical engineering students try to find a diversion from their studies? Well, if it is April 1994 at Stanford University, one thing that can happens is that the students, David Filo and Jerry Yang decide to create a data base of interesting things on the web. In the beginning it was simple and just for their own use, but it quickly gets out of hand. Although they begin with some simple Unix tools like Tcl/Tk and Perl scripts, they eventually add a good user interface. Their fame spreads through word of mouth. Later this is called “viral marketing,” but no one really knows about marketing on the internet in 1994. Not too many people even know about the Internet, and those that do tend to be dismissed as geeks. (Authors note: I plead guilty to geekdom!) Their fame continued to grow trough out the rest of the year as they added functionality to the site.
There is some disagreement about how the name came about. Some say that Yahoo! is short for "Yet Another Hierarchical Officious Oracle" but Filo and Yang claim it is because they are yahoos. Filo is from Louisiana where the term seems to be used more often.
In 1995 their path intersected with another titanic figure in eBusiness, Marc Andreessen. Marc invited them to move their site off the Stanford Computer systems workstations (named Akebono and Konishiki after famous Sumo wrestlers). Once it was installed at the Netscape computer system, the site was off and running.
As many entrepreneurial start-ups must do, Yahoo decided to bring in some experience to help grow the business. Timothy Koogle, a dapper dressing, race car driving, nine year veteran of Motorola joined the tee shirt and tennis shoes crowd at Yahoo. Over the years he has guided them deftly to amazing success!
In august of 2000, Yahoo had reached a market capitalization of 66 million dollars with a stock price of $122 and that was less than half its high of $250 at the beginning of 2000!
Amazon.com
Amazon.com represents the quintessential eCommerce company. It was one of the first to demonstrate the potential for "virtual" upstarts to upend the market leading "bricks and mortar" companies. In the book selling industry, Barnes and Noble had been the market leader with 1011 "bricks and mortar" stores in 1998. Borders was the next store on the list. Barnes and Noble fought back vigorously on its own and Amazon.com's turf, while Borders took a go-slow approach. Amazon.com demonstrated the potential for why eCommerce has such industry transforming potential and what the prospects are for the established market leaders.
Early caution flags were raised when the Gartner Group released a report criticizing the response of most industries to eBusiness or eCommerce and providing some cautionary tales.[6]
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In an article in Strategy and Business, Laseter et. al. argue that Amazon.com’s early success in the book industry came as much from extracting value from the value chain as it did from developing the retail sales model.[7] With authors taking $2.50, printers $2.00, publishers $8.00, distributors $5.00, and retailers $7.50 of a $25.00 book, the supply chain costs in the book come to $8.49. By dramatically reducing returns from 30% of orders to 3% of orders, Amazon wrung nearly $90 million from the supply chain, but the authors conclude that a truly efficient model could take $2 billion from the inefficient supply chain. The authors conclude that 5 axioms define the model: 1. Inefficient supply networks are at risk 2. First movers gain advantage from scale. 3. New Delivery systems require big investments 4. Defining new distribution systems is vital 5. Use customer knowledge for pull marketing. |
Amazon.com also became embroiled in a legal battle against Wal-Mart who alleged that Amazon.com had stolen many of their trade secrets by hiring away Wal-Mart IT personnel in large numbers. This has relevance to the case since (as we shall see later) Amazon.com must expand into other product lines in order to maintain the growth called for by its very high valuation. One example of this expansion is in pharmaceuticals, and Amazon.com had managed to make a two jump hire of a key Wal-Mart Executive from this area.[8]
On 29 September 1999, Amazon.com shocked Wall Street and enjoyed a huge bump of 23% in it's stock price by announcing the formation of ZShops an on-line shopping mall. This dramatically expanded the reach of Amazon as they tried to position themselves for one-stop shopping for nearly everything![9]
On October 25, 1999 Fortune did an in depth review of Amazon.com that took at look at their global strategy: "Amazon vs. Everybody."[10] The article starts with: "Forget Amazon vs. Barnes & Noble, Amazon vs. eBay, even Amazon vs. Wal-Mart. This company has bigger plans. But when will it make money?" and ends by concluding "Right now, there seem to be two possible conclusions to the Amazon story. Ending No. 1 goes like this: In ten years Amazon becomes so huge, so omnipresent, that it will be hard to imagine that it started out as a tiny bookseller way back in 1995. Ending No. 2, equally believable: Amazon is undone by its own ambitions and winds up as a footnote in the history of business. In the meantime, Amazon watchers await the next big move. Sure enough, as this story goes to press, a news release appears in my e-mail: 'Amazon's new shopping tool will be unveiled in November.'"
That new shopping tool was unveiled and led to another round of revenue growth for Amazon. Unfortunately, the revenue growth did not lead to earnings as Amazon had to reinvest in the infrastructure required to service their growing customer base.
In a curious turn of events, Amazon.com launched a bricks initiative by deciding to build a network of warehouses to enhance their ability to deliver product. While most attention was on the need for the “bricks” to learn “clicks, Amazon was focusing on the need to add “bricks” to “clicks!” In other words, not only did the established enterprises have to learn how to survive on the internet, but the internet “dot.com” companies were going to have to figure out how to build the infrastructure already enjoyed by their established competitors. Infrastructure, which had been seen by some as a liability, could now be viewed as an asset.
When the air came out of the Internet bubble in the spring of 2000, analysts began to look at the dot.com’s with a much tougher set of standards and Amazon was no exception. Business Week published a hard-hitting article entitled; “Can Amazon make it? An in depth analysis of its business model, finances, and prospects.”[11]
This will undoubtedly become one of the classic business cases of our time.
Market Valuation
Consider the market valuation of Amazon.com in comparison to some other well-known companies [Business Week 1]:
(Compared with some well-known companies)
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In the section on Finances, we shall see what happened to Amazon as their stock fell abruptly during 2000 and look at the wasy of evaluating companies like Amazon as a prospective investment.
Ebay
Auctions
PricelLine.com
Reverse Auctions
ENRON
How can an old economy company (a dinosaur?) that was set up to do distribution of gas nationwide, become a new economy powerhouse trading all form of energy and bandwidth? Energy Trading through a B2B exchange. We will look at Enron in detail in the chapter on Business to Business eCommerce. It is an amazing story with a tragic ending.
E*Trade
ON-Line trading
IBM
The dinosauriest of Dinosaurs, IBM was long ago written off as a purveyor of big iron that just did not get it. Enter Lou Gerstner. Convert mainframes to internet ready servers, create a service business that comes to dominate the revenues, invest heavily on open systems like Java, and watch them go.
Microsoft
The youngest of the Dinosaurs, Microsoft is learning to stop behavior and love the net. Will Microsoft.net provide the technologies for the next generation of eBusinesses? Will the justice department rain on their parade and break them up damaging their plans? Or, will the world just rush on by moving in internet time and consigning Microsoft to the ranks of those that once were great like VisiCalc, Word Perfect, Lotus 123, Borland TurboPascal, Novell, and others who once dominated and then became bit players.
Covisint
Can three old economy companies learn to love each other and live happily every after on the Internet trading car parts? In the case of Delphi/GM, Visteon/Ford, and Daimler Chrysler, the answer is a definite maybe. They are trying very hard to collaborate, but collaboration is an un-natural act for them. Throw in an FTC investigation for potential anti-competitive behavior, a potential insurrection by suppliers, and a cold shoulder from the other car manufacturers and you have a recipe for an interesting chapter on Business-to-Business industry wide portals.
mySAP
In the good old days of client server computing the ERP vendors like SAP, PeopleSoft, Baan, and others became the latest “in-thing” in large corporations. The expense and difficulty of installation and the huge training requirements cause companies to swallow hard, but the promised integration was the holy grail of enterprise computing. And then? And then? The world moved on and the big client server ERP vendors found themselves running to catch a train moving in Internet time. How could one web enable ERP? It was not easy
Hosting and ASP strategies provided a potential answer. If the ERP systems could be hosted and accessed through a browser, then perhaps the old client server architecture could be reincarnated as a web application. MySAP was launched by SAP as their effort in this direction. We will return to SAP and mySAP as we look at ERP systems in a later chapter.
Exercises:
The Netscape Multimedia Case looks at Netscape in October 1998. It asks several interesting questions in the light of later events:
1. Will Netscape continue to "enjoy it"?
· How could a young startup threaten the giants of the computer industry without a blink?
· What is the source of Netscape's strength? Is it sustainable?
· Will Netscape manage to take the intranet and groupware markets by storm, or will Marc Andreessen have to work at Microsoft?
The story continues when Netscape enters discussions with AOL about a possible merger. Was Netscape throwing in the towel on the titanic battle with Microsoft? Did Netscape lose? Or win? And now, what happens to the rest of Netscape? Will the iPlanet products of the Sun-Netscape-AOL alliance provide the platform for the next big move in eBusiness?
Exercises