1 Business Trends on the Internet Harvey Golomb Payoff This article discusses business use of the Internet today and assesses the potential for growth in three main business areas: Internet access, Internet software, and Internet publishing. Marketing and security issues are also discussed. Introduction The Internet, that vast computer network connecting thousands of computers and millions of users, is rapidly becoming a fertile incubator for new business ventures. Many new businesses are capitalizing on the growth of the Internet itself, and many more businesses use the Internet to improve existing operations or to create new ventures. This article describes how the Internet is being used by businesses today and suggests areas where opportunities for future business development lie. The Internet: an Overview Simply stated, the Internet is a computer network connecting other computer networks as well as individual computers, be they PCs, Macintoshes, workstations, or mainframes. Any computer connected to the Internet can communicate with any other computer on the network, nationwide or globally, independent of platform. This communication can be as simple as electronic mail ( ) or as rich as the interactive, multimedia World Wide Web (WWW). The power of the Internet lies in its being an open network; any computer network willing to conform to the Transmission Control Protocol/Internet Protocol, or TCP/IP, communications convention used by the Internet can connect to it. Because such connections are widely and inexpensively available, there is a virtual stampede among businesses and other organizations to connect to the Internet. The Internet as a Strategic Business Tool The Internet's quick transformation to a business tool is reminiscent of the fax machine's leap to prominence in the office in the mid-1980s. Two Internet services and the World Wide Web are already near necessities to effective business operations. Few large companies operate without internal , and most find it necessary to be connected to the Internet for global . Likewise, many large companies have WWW sites for marketing and technical support. Small companies and even individuals are adding and the WWW to their arsenal of business tools so that they can communicate on an equal footing with larger competitors. Companies that do not learn how to use the Internet effectively will be at a major competitive disadvantage in the very near future. Internet Business Use Today Businesses use the Internet for various forms of electronic communication, marketing, and publishing. In addition to , communications services include systems for transferring files between computers. The most popular of these is the File Transfer
2 Protocol, or file transfer protocol. A related communications service is the USENET newsgroup system a huge collection of computerized bulletin boards. Thousands of newsgroups cover every conceivable topic from computers to agriculture to fly fishing. The Internet is widely used for marketing. The World Wide Web supports such applications as displaying electronic brochures and online product catalogs. Web brochures can include text, full-color photographs and drawings, and audio and video. The WWW also supports electronic publishing, which is now being tested and used by such companies as Time, Inc., The New York Times, and ESPN Television, to name only a few. Several thousand companies have already established Web sites on the Internet to post current information about themselves and their products. They have addresses like and (these are actually the addresses for IBM Corp. and Ford Motor Co., respectively). Internet users entering these addresses can learn about companies, place orders for products, request printed information, or even receive such products as software and movie clips immediately through the network. Many observers believe that by the end of this century, nearly all computers will be connected to the Internet and it will be imperative for most professionals to have addresses and to be accessible over the Internet. An Internet address on a business card will be as common as fax numbers are today. Similarly, over the next few years, most companies, from government agencies to nonprofit institutions, are expected to establish Web sites. Internet Business Models Companies are expanding their use of the Internet as a communications tool to transact business through the interactive, multimedia World Wide Web. Thus far, three types of businesses have developed around the Internet: Internet Access Provider, Internet software developers, and Internet publishers. Internet access providers are the largest of the three classes today, but publishing holds the greatest promise for long-term growth and profits. Internet Access Providers Internet access providers (IAPs) were the first big businesses to develop around the Internet. As the companies through which businesses and individuals connect to the Internet, the Internet access providers perform functions similar to those of local phone companies when connecting phone users to the long-distance carriers. Internet Access Provider provide the connection from an individual's or business's front door to the worldwide Internet. The Internet access providers connects its clients to the Internet through a high-speed connection. The TCP/IP packet protocol used by the Internet allows data from many users to be mixed on one high-speed line. Communications processors throughout the Internet route each user's packet and deliver it to the proper destination. Internet access providers link their clients to the so-called Internet backbone, which is a high-speed network operated by five large communications companies. IAPs provide two basic types of connections: dial-up access and dedicated access. Dialup access is typically used by individuals or occasional business users. Subscribers install Internet access software on their computers and dial into their Internet access providers. Typically, they enter a password and are then connected to the Internet. Dial-up connections cost about $25 per month. A dedicated Internet connection supports many users simultaneously. Typically, a company wanting access for its employees links its local area network or mainframe
3 computer to the Internet Access Provider using a dedicated phone line. Such a connection costs between $500 and $2,000 per month, depending on many factors, including line speed. The Internet access business is like the telephone business. In each business, companies must install relatively expensive equipment to accept, process, and route calls or data, but once networks are in place, the cost of processing calls is very low. As volume grows in this high capital cost, low operating cost business, profits increase dramatically. Thus the Internet access business is attractive for any company that can achieve volume and remain competitive. As the number of companies and individuals rushing to obtain access to the Internet has grown, so too have the revenues of Internet access providers. Many of them have been doubling their revenues and customer bases annually for the past several years. Although such growth rates cannot continue indefinitely, these companies may well build substantial businesses before the rates level off. To support these high growth rates, nearly all the Internet access providers have been investing heavily; as a result, none has, as yet, reported substantial profits. There are three types of IAPs: local providers offering access within a small geographic area, national providers offering access in many areas of the country (and in some cases, offering national 800-dial-in service), and commercial online service providers such as America Online, Prodigy, and CompuServe, which now offer their customers Internet access. Local Internet Access Providers. Local providers exist in all major metropolitan areas and in many smaller towns. They vary in size from very small companies operating out of the metaphorical garage to large publishing companies that have added Internet access to their local newspapers as an additional service to their communities. In the Washington DC area, for example, Capital Area Internet Service is a small, early-stage company providing local access. InfiNet, a part of the much larger Landmark Publishing concern, provides local Internet access in many of the cities in which Landmark publishes newspapers. In smaller towns, local access providers offer users the only option for obtaining Internet access without paying high long-distance telephone charges. Entrepreneurial opportunities exist to provide local access where it is unavailable, unreliable, or otherwise of poor quality. Once users find a quality access provider, they are not likely to switch to another provider. Business opportunities also lie in merging local providers into larger networks of regional or even national providers. National Internet Access Providers. Several well-financed and well-managed companies provide national access. Three young companies UUNET, Performance Systems International (PSI),and NETCOM On-Line Communications are reported to be eyeing international expansion. Having gone public only in 1994 or 1995, each of the three companies has the substantial financial resources to fund rapid expansion. All three are targeting service to 100 to 200 US cities. MCI Communications, the long-distance telephone giant, has entered the access business in a substantial way. In addition to providing Internet access services, MCI recently joined with Rupert Murdock's News Corp. to jointly produce content for the Internet as well as to provide other, international Internet services.
4 All of the national and international Internet access providers anticipate achieving substantial economies of scale as their large investments in computers, communications equipment, software, and service organizations are spread over exploding customer bases. If the Internet access business follows the example of the long-distance telephone business, the market can probably support two or three national Internet access providers. Becoming a national Internet access providers now requires substantial capital investments and the marketing savvy and clout to compete on a national scale with experienced and wellfinanced competitors. In the long-term, the national Internet access providers business may well become a commodity business with one or two marginally profitable competitors. Entering this segment of the Internet business is best left to the well-heeled and bold. Online Service Providers. The three major online service providers America Online (AOL), CompuServe, and Prodigy support closed networks accessible only to subscribers. Thus these networks differ from the Internet, which is open to anyone with Internet access. They also differ from the national Internet Access Provider like UUNET and PSI because they offer their subscribers content as well as access. Although the online services and the Internet access providers compete for the same subscriber, the competitive advantage of the online services ultimately lies in the quality and value of the content and services they have developed for their proprietary networks. Unlike the Internet access providers, online service providers have been profitable, although margins have been low. The big three of the online business are bracing for a potentially bigger fourth contender Microsoft Corp. With the introduction of Windows 95, Microsoft began offering the Microsoft Network (MSN), which competes directly with the current online services. The outcome of the new MSN was anything but obvious as of this writing. Starting a new online service today is not an attractive proposition. The market is already crowded with experienced, aggressive, well-financed players. Microsoft's entrance into the market is expected to erode the online service providers' already low profit levels. Internet Software Developers The Internet runs on more than the wires and modems of the Internet access providers. It takes software at both ends of the wires and all along the way. Browser and Server Software. The best-known Internet software is the browser that supports each computer attached to the WWW. The browser allows the user to specify the address of the Web site to be displayed and then displays that information on the screen. In addition to browsers, the Internet requires server software to store, process, and transfer data such as World Wide Web pages, files, and . All Internet applications require browsers and servers. The first popular Web browser, Mosaic, was developed by the government-funded National Center for Supercomputing Applications (NCSA)and given away to Internet users. NCSA also developed a server to support Mosaic. As Mosaic grew in popularity, NCSA decided to license it to ensure widespread use with adequate commercial support. The licensing of Mosaic generated a flurry of activity; numerous companies now operate under the NCSA license (through NCSA's master licensee, Spyglass, Inc.) and market their own enhanced versions of Mosaic. In addition, several companies have developed Web browsers and Web servers independent of the NCSA license. Currently
5 the major players in this market are Netscape Communications, Spyglass, Spry (now a division of CompuServe), Quarterdeck, and America Online and Prodigy, both of whom offer their clients proprietary Web browsers. IBM and Microsoft offer proprietary Web browsers bundled with versions of OS/2 and Windows, respectively. Also in this market are vendors of servers only, including O Reilly & Associates, Open Market, Inc., and several data base publishers with enhanced versions of their own data bases that include Web servers. Netscape has taken a commanding early lead in popularity among users in the market for desktop Web browsers. It also leads the field in commercial-grade server software, particularly where security is an issue. Spry, Spyglass, and Quarterdeck are also establishing reasonable Web browser market shares. All of the competitors are well financed and the markets are expanding rapidly and will probably support several competitors. Issues facing participants in this market include Microsoft's entry with a browser bundled with Windows 95, Netscape's large market share (70%), and the fact that there are six other competitors, several of whom are fast-moving, entrepreneurial software companies. Most of the survivors in this market already deliver product; the unknown is which ones will survive the competition. Publishing on the Internet The Internet has tremendous potential as both a low-cost publishing medium and a low-cost distribution system, but these same features are a double-edged sword. Publishers find the market an attractive one to enter, but they are challenged to create defensible businesses with reasonable barriers to competitive entry. Thus, the would-be Internet publisher must establish a competitive advantage such as proprietary information, brand awareness (which is difficult for information products), or some other market edge. Internet publishers are developing three business models: The subscription revenue model. The advertising model. The unit-pricing model (where users pay for an article or book). The advertising model is used when the information itself has relatively low value (such as news or sports information) but the Web site attracts a large number of viewers. The unit-pricing model is often used by traditional data base information vendors when the information itself is perceived to be valuable and users are willing to pay for specific facts or reports. Several publishers entered the market without charging any fees but are expected to begin charging after an appropriate product shakedown period. Several traditional information publishers now deliver information over the Internet. International Data Corp. (IDC) offers numerous online reports and E-flashes for immediate notification. Dialog (owned by Knight-Ridder)delivers information by Internet but as of this writing did not have interactive Internet access. One of the most aggressive publishers on the Internet is Individual, Inc., which offers NewsPage, a current awareness service drawing from hundreds of news sources. The user selects topics from a list and then receives the relevant stories, either in summary format or as full text. The service is offered at fixed monthly prices that vary based on the number of sources selected. In addition, some full-text information is billed at a premium. NewsPage
6 covers a broad range of topics and has received a great deal of coverage. Its subscriptions are growing rapidly. NewsPage also sells advertising on its Web site. Thus users retrieving information can select Ad buttons that give them a full advertisement from the vendor. An interesting wrinkle here is that subscribers are offered a discount if they agree to allow their names to be given to advertisers. Thus far, NewsPage seems to be a good model for low-cost information services on the Internet. Another type of information being marketed over the Internet is information about the Internet. Several directories list Internet sites, and a number of search tools allow users to describe what they are looking for and receive a list of sites matching that description. Several of these sites are very popular, receiving numerous hits or visits daily. The best known of them Yahoo is one of the busiest sites on the entire Internet. Yahoo plans to continue to offer its search service free of charge, but the company will sell advertising on the site to generate revenue. Giving news or other information away (or at low cost) and selling advertising is the traditional business model of the newspaper. Hundreds of newspapers are experimenting with information delivery over the Internet using a similar universal model: access to the news is either free or nearly free, and the papers sell advertising. Some of the early players here are the San Jose Mercury News, the Raleigh News and Observer, the San Francisco Chronicle and San Francisco Examiner, and a recent entry from the Wall Street Journal. Newspapers have a natural constituency as well as a product (i.e., news) ideally suited to the fast pace of the Internet. They also have existing relationships with advertisers, so they may be able to readily generate the needed advertising revenues. Marketing Products on the Internet The beauty of marketing information over the Internet is that information products can be delivered electronically for instant gratification. Physical products can be marketed over the Internet too, but ultimately, they must be delivered by less exotic means. Products of all sorts are sold. From the convenience of a computer, consumers can order flowers, hiking boots, pizza for delivery (if they live close to an Internet-aware pizza parlor), pen sets, and toolkits (the kind with hammers and screwdrivers, not software for sorting and summing). Large companies marketing over the Internet include Flowers, Lands End, and Hammacher Schlemmer, among many others. Some retailers are setting up their own Web sites and attempting to market products themselves. Most, however, put their electronic storefronts (i.e., their electronic catalogs) into electronic malls, just as they put their stores in malls. MCI has a popular mall as does the Home Shopping Network with its Internet Shopping Network. Unlike the obvious consumer benefits offered by real malls (such as the convenience of having stores close together), electronic malls have yet to prove their value. Because consumers are never more than a few mouse clicks from any site on the Internet, consolidating stores in an electronic mall may not offer many advantages. Are the Retailers Too Early? Although there has been much discussion in the popular press about marketing products on the Internet, there are not many success stories. The business model of the printed catalog that offers consumers the benefits of shopping at home has not worked well on the Internet yet. The Internet is still too slow and most computer screens too small to allow for the kind of convenient browsing consumers do in paper catalogs. Because prices
7 on the Internet are not generally lower than store or print catalog prices, there is no compelling reason to shop on the Internet. The problem of slow browsing as well as of price may be eliminated over time. Technology will certainly improve, facilitating better graphics and faster response times. As the volume of transactions on the Internet increases, many products may become cheaper than the same items in stores or print catalogs. Merchants do not have to pay for the cost of mailing the catalogs or for expensive retail rent space. Internet Security Internet users are appropriately concerned about the privacy and security of their Internet transactions. People ordering products, services, and information do not want the nature of their transactions compromised, nor do they want sensitive information, such as bank account and credit card numbers, to be divulged. The current generation of Internet hardware and software provides good transaction security, and the next generation will be even better. Today's secure browsers and servers allow a merchant to request a credit card number(or other sensitive information) and to have that information encrypted before transmission. Thus the data sent over the phone lines (i.e., over the Internet) is scrambled and cannot be translated into a valid credit card number even if it is intercepted. Once received by the merchant, the number is decoded and submitted to the credit card clearing system. Over the next few months, today's systems, although not entirely foolproof, should become almost universal throughout the Internet and largely eliminate this form of data vulnerability. In addition to transaction security, Internet users are concerned about the security of their data once it is received, processed, and stored by the merchant. Newly developed software systems will provide a much higher degree of security in this area. These new systems integrate advanced data base software with Web servers so that traditional, welldeveloped mainframe computer data security procedures are maintained. Information stored in these systems will be as secure as the transaction data currently stored by major retailers and nearly as secure as bank records. Conclusion The Internet nurtures some of the biggest business opportunities of the 1990s. There are 20 million Internet users today, a figure expected to reach 100 million by Supplying these users with access holds tremendous promise for rapid growth. Likewise, Internet users will require software for everything from browsing the Internet, to ordering products, to sending and receiving electronic mail. Software developers could hardly ask for a better opportunity to develop products for such a rapidly growing, easily entered new market. Beyond Internet service and software, publishers are scrambling to take advantage of the new world of low-cost publishing and virtually free information distribution represented by the Internet. Nearly all major publishers are readying products for the Internet. Small publishers are quickly following suit, and new Internet publishing ventures are being announced nearly every day. Finally, traditional retailers are establishing beachheads on the Internet and marketing everything from shoes to flowers. The major unknown in all these ventures is where exactly the profits lie. Author Biographies Harvey Golomb
8 Harvey Golomb is president of NETSCAN Technology Corp. in Fairfax VA, an Internet business and marketing services provider with clients in both the private and public sectors.