A Clue...to Internet Commerce

by Dana Blankenhorn

For the Week of August 25, 1997

Volume I, No. XXVI

This Week's Clue: Business Models

A proper business model must be honest on both sides of the equation.

Neil Budde, editor of the Wall Street Journal's Interactive Edition, considers this a key clue. He told us recently one reason he's not ready to declare a profit, despite having over 125,000 subscribers at an average price of $40/year, is because he's careful to apportion part of his paper's newsgathering costs to the online product. If you don't, he said, you're cannabalizing yourself. You may claim a profit to your bosses, but it's at the expense of your core business.

That's a reason why Martin Nisenholtz, president of the New York Times Electronic Media Company, which includes their Web site , has essentially built his own version of the DoubleClick Network to serve his site. Only by adding value to a view ads get of subscribers, through personalization based on user names and passwords, can he justify the high cost-per-thousand he needs to hope for a profit, he indicated. Since his system doesn't use cookies -- he requires registration -- he figures he's giving advertisers more true value than any network can. And the Times' natural demographic gives him hope of generating profits, once his development costs are capitalized.

Randy Bennett, vice president-new media for the Newspaper Association of America , admitted questions of business models make him question his own numbers, including an estimate that 30 percent of his members will show an online profit this year. Since he didn't insist respondents base their estimates on all costs -- including a portion of newsgathering costs -- he can't be sure whether he's getting an accurate read. But he does know the profit demands of newspaper chain managers mean that, whether or not some new media managers are gilding-the-lily for him, they can't get away with that forever.

Or can they? Beyond the cluelessness seen until now among many of the nation's Big Media types in regard to the Web, add this argument. We can wait until the market develops then buy our way past the pioneers by making sweetheart deals with sites which aggregate (read control) millions of clicks. An alliance of five regional Bells recently did just this through an agreement with Yahoo and Netscape, upsetting even one of their own . Call this the Microsoft assumption -- he who has the gold makes the rules.

Since many news organizations are virtual monopolies in their localities, the argument goes, all this talk of business models, etc. is beside the point. Just wait for the herd to thin, then swoop in and turn the Web into TV. This is the kind of thing that keeps cluelessness alive. Local monopolies are even more-vulnerable to rivals which use non-Web means of advertising than Bellheads. There is no guarantee this latest Bellhead deal will kill off everyone else , although there are sure to be casualties. Some companies do die after developing worthy niches when larger rivals eat their cheese. Some do fail internally -- losing their swerve when they first taste success, or trying to cash-out too soon. There are mistakes even clued-in companies can make.

But ignoring all lessons, saying you're too big to fail, is still wrong. Once the revenue's there, spend the time to look at both sides of your balance sheet. You may not fail from today's mistakes -- but it could be a close call .

SSP (Shameless Self-Promotion)

We got game. In May it was USA Today , calling us a "hot site." Next came Jayde , which gave our PPN site, run by Sean Cafferky of Houston, its coveted "Jayde Gold Diamond" award. Now the "San Jose Mercury News" Online Today columnist, Patricia Sullivan , wrote in her "Good Morning Silicon Valley" column we've got things to say which are worth hearing. Thanks so much.

Want to know what you can do to help? Remember that it's Journalism -- checking the news, calling people, listening carefully, writing on deadline -- which keeps the clues coming, although I also handle consulting and commercial writing (ask about those rates via e-mail). If you're looking for excellent work -- like that found in my column at Atlanta Computer Currents or my regular work for Net Marketing magazine don't wait for the e-mail -- give me a call at 404-373-7634.

One Great Business Idea

Want to start making a fortune, right now? Hear me out.

The biggest problem in book publishing today is that "mid-tier" authors (like me) can't get a gig. "Best-selleritis" and general cluelessness have forced publishers to pare their lists. Unless you're a guaranteed big seller , fehgetaboutit -- mid-tier authors are being priced out of the market due to the costs of marketing their books.

What I hear is an industrial process failing to adapt, which smells like opportunity. The same thing is happening in the movie business, and you know who took all the Oscars last year?

What the world needs, it seems to me, is a Web-based book publisher. Sign-up those mid-tier authors, and start your business by getting back rights to their back-lists. If you don't just offer royalties, but a 50-50 split of everything over your costs (with an honest accounting), you'll eventually be in a position to get those best-sellers, too.

Nelson Winkless, author of "The Elements of Business Communication" and other light classics, recently mused over this with me via e-mail. He is working with a just-in-time publisher called Trafford Publishing in Victoria, BC. "The problem is no longer 'manufacturing books,'" he writes, "but SELLING books." There are only two types of players in this game -- publishers and authors. Publishers need volume to make the numbers work, authors are no good at it. "I'm learning how to go about that, as a reluctant sales type, great on theory, writing copy, and all that, but lousy at closing sales for myself or anybody else," writes Winkless. Many authors have had to do just what he's doing, and some have made a living at it.

Sites like Amazon.Com work on margins so thin they can't really afford warehousing -- they order and deliver. The key is getting together the capital, the Internet expertise, and the marketing smarts to build a set of vertical sites (mysteries, sci-fi, business, computing, etc.), each of which is a free-standing business which can attract browsers. In other words, what's needed is a cost-effective way of creating, and capturing the marketing value of books. "Indeed, I don't think anybody has developed a good way to market publish-on-demand books," Winkless writes. Which is my point exactly. "The world teems with people who can write books, but few who can hustle them effectively," he adds. "There must be some way for us to set up a virtual publishing house that doesn't eat any capital except time, and produces worthwhile revenue, which all of us seem to need."


The Coffee Mugs Are Neat, Too

Narrative has released Version 2.0 of Enliven, their ad creation tool. This won't work for everyone -- you need their $40,000 server -- but you can go through your ad network if that's too rich for your blood so no harm done. Narrative sent out keep-cool coffee carriers when Version 1.0 of Enliven came out, and mine still works. So maybe the software does, too.

Essentially, the Narrative solution streams anything created with Macromedia Director as Java files which go inside the ad box. (This requires a 20 kilobyte file which is loaded on your browser with the first such ad you get.) Marketers can thus do all sorts of interactive tricks, both eye-candy and forms which are actually useful. No Shockwave crashes, and since it's streamed the ad file itself can be bigger than before. The fact that DoubleClick is already supporting the Narrative technology is the clincher.

One alternative drawing a lot of interest lately is the full-page "interstitial ad." Berkeley Systems , the pioneer in this area, recently released a study from Millward Brown International claiming these ads have real branding impact, boosting the chances a viewer will buy the advertised product. Lesser-known products like Web sites can double their "mindshare" -- heavily-advertised brands get a much smaller boost. This is great news for gaming sites, whose users may want to stay through the ad, although we need to hear a study of "click-away" reaction before content sites jump-into this. What does it cost the site in goodwill, if anything?

Nipping That Achilles Heel

Kudos to Netscape for unbundling the browser portion of Navigator 4.0, creating a true "thin-client" for use by companies like H-P, IBM, Digital, Sun, SGI and Novell, whose other technologies are competitive with Netscape's other efforts. Returning to a truly thin-client, which others can then add value to, really does keep desktop market share away from Microsoft , no matter what it does to force Internet Explorer onto PC desktops. Desktop share maintains Netscape's place at the standards' table and prevents Microsoft from taking the game...for now.

Just One Word...

About that "big" decision recently which may give big sites automatic Internet rights to articles they buy from freelancers? As Tony Bove has said so brilliantly, "Always beware of any business where the first word is submission." Put more succinctly, BFD...

Clued-in, Clueless

Clued-in is Marimba. I admit to having been skeptical of their technology and prospects, but the deal they did recently with Microsoft, creating a standard for automating software updates called Open Software Description which Microsoft must write to but works well with Marimba's Castanet, is more than a wee-bit clever. Marimba should now be able to carve-out a good market share in an area where it was late to the party . If you're using what Microsoft uses and you're not Microsoft, you can do some serious business.

Clueless this week is CKS CEO Mark Kvamme, for telling a Jupiter Communications conference in New York recently "The Internet will be just like television." Let's re-visit the math, shall we? Broadcast networks needed a 30 share, because there were only 7 choices in big markets. Cable nets live on a 2 share, in a world of maybe 70 channels. The business models of satellite systems assume a .5 share, given a world of 400 channels. And the Web, when mature, will have 1 million channels. Only if you assume advertising is the sole Web business model can you dream of only a few dozen winners. HINT -- you aggregate a mass-market buy on the Web not through a site, but through a Web ad network . Sheesh!

A Clue...to Internet Commerce is a weekly publication of @Have Modem, Will Travel. It's sent free to a qualified e-mail list. Like Netscape Navigator, it carries a list price -- $49 per year. (Unlike Netscape, we don't expect you to pay it.)Subscribers can receive either a .txt file or an .htm file. The .htm version features links which become active when online with a browser, or an e-mail package like Netscape 3.0. (Let us know which you prefer.) To take your name off the list, simply write REMOVE as the subject, or content, of a message replying to this post. To request your free copy, write us at Dana Blankenhorn@worldnet.att.net. We're on the Web at www.tbass.com/clue and www.ppn.org/clue.

A Clue...to Internet Commerce -- Copyright @Have Modem, Will Travel and Dana Blankenhorn, 1997