Transcript Get Big Fast

1-1
internet
business models
text and cases
Network Utility Provider
Tony Gauvin
© 2003 UMFK.
1-2
Overview
• Definition, Categorization, and delineation
• Network Utility Economics
• Establishing Standards
– Key factors
• GBF?
• Winner take All
© 2003 UMFK.
1-3
Definition
• Software programs that connect users with
destination websites or with each other
– Downloads and/or plug-ins
– Often free in order to capture dominant market share
– Attempts to develop standards
• Example
–
–
–
–
Flash
Adobe Acrobat Reader
America Online ICQ (Instant Messenger)
Real Player
© 2003 UMFK.
1-4
Categories
• Media Players
– Streamed media
– Downloaded media
• Communications enablers
• E-wallets
• Common Characteristic
– Provider must mobilize a network of users
– exploit a network effect
© 2003 UMFK.
1-5
Some Hybrids
• At times NUP create portals that promote a
new media
– Shockwave.com
• Free games
• Animated short features
• At times online portals create Network
Utilities to create stickiness
– AOL Instant Messenger & Net2Phone
– MSN Messenger
© 2003 UMFK.
1-6
Economics
• Similar to Online Content Providers
– Significant upfront fixed costs
– Minimal variable cost of distribution
• Different in that while OLCP’s seek advertising revenue;
NUP’s seek revenue by selling server software and
authoring tools
– OLCP need more customer to increase Advertising revenue (more
eyeballs)
– NUP want to create a dominant standard (“Highlander model”
>>there can be only one!)
• We look at Media Payer economics
– Adobe, Macromedia, RealNetworks
© 2003 UMFK.
1-7
Sources of Revenue
• For Media Players
– Server software, Authoring Tools, Professional Services
• Largest component
• 70% for RealNetworks in 2000
– Premium versions of the “free” players
• RealPlayer Plus
• Adobe Business Tools
– Advertising
• Real.com $ shockwave.com portals
• Free Client software has advertising panels
© 2003 UMFK.
1-8
Cost Structure
• High Gross margins
• High R&D
– 20% Adobe, 25% Macromedia, 22% Real
Networks
• High sales & marketing
– 32% Adobe, 43% Macromedia, 40% Real
Networks
• G&A tends to be fixed around 9-12%
© 2003 UMFK.
1-9
Profitability
• All 3 Companies are profitable
– They are 3 survivors form a larger pool
– Operating income as a % of revenue
• 9% for RealNetworks
• 12% for Macromedia
• 31% for Adobe
© 2003 UMFK.
1-10
Establishing a Standard
• De Facto standard created when critical mass of users achieved
• Key factors
– Price
• Cheaper than free?
– Launch and Upgrade timing
• First mover or best product?
• When to upgrade player and/or server (Chicken and egg)
– Backwards Compatibility
• Must be evolutionary not revolutionary
– Compatibility with Rival Standards
• Leverage existing user base
• Depends on whether or not you are the leader
– Microsoft does not do PDF
– Adobe does Flash
– Interconnection
• AOL Instant Messenger vs. MSN Messenger
© 2003 UMFK.
1-11
Key Factors (con’t)
• Segmentation
– One-size fits all or target specific customers
– Superior products tend to win specific segments
• Pricing
– Browser wars –Free IE or $ for Netscape
– Discount server software and authoring tools?
• Distribution Partnerships
– Have Content Providers and Portals encourage downloads of free players
– Co-brand
• Software Partnerships
– IRS uses PDF
• Content Aggregation
– Websites with compelling entertainment media
© 2003 UMFK.
1-12
GBF
• Network effects
– By definition NUP’s have strong network effects
– “Users beget Users” First Mover advantage
• Scale Economics
– High fixed component that get amortized over more
sales
• Retention Rates
– Familiarity with authoring tools
– Communities of users
© 2003 UMFK.
1-13
Winner take all!
• GBF is a strategic Imperative for NUP's
• Racing Behavior
– Spend heavily
• Marketing and R&D
– Aggressively pursue partnerships
– Preempt competitors
• Downside
– A standards battle between closely matched competitors
leaves one BROKE winner and one BROKE loser
© 2003 UMFK.