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the truth about business models

the truth about business models - THE TRUTH about INTERNET...

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THE TRUTH about INTERNET BUSINESS MODELS In the end, an e-business is just another business By Jeffrey F. Rayport FROM STRATEGY & BUSINESS, ISSUE 16, THIRD QUARTER 1999 Everywhere you go business people are asking the same questions about Internet commerce. Why are profits scarce or nonexistent? Why is there so much uncertainty about Internet business models? When will some modicum of order emerge from the chaos of doing business on the Web? You can hardly blame thoughtful students of business for reaching a state of exasperation when trying to understand why these questions go begging for answers. In just three or four short years, e-commerce has evolved at lightning speed through a succession of persuasive business models and approaches. The only problem: Each business model seemed viable only for a few minutes or hours, not weeks or months or years. Moreover, each successive iteration seemed to invalidate much of what had come before. Consider that in the beginning there was a marvelous model for making money in the online environment. It was called the content business. The economic basis for it: connect-time revenue splits. It is the time-honored mode that made often small or unknown content providers on America Online (AOL) rich and famous. Its rules were simple. People who supplied content to online services (AOL was but one of many such services just a few years ago) got credit for helping keep users online. Since users paid by the minute or hour, this generated connect-time revenues that were allocated according to a negotiated split between content providers and online services. When the numbers of users became large, these deals could generate unexpected riches — whether for psychiatrists offering online counseling or financial advisors proffering online advice about pension plans and mutual fund investing. The scheme also worked beautifully for media companies supplying information that captivated users, be it Viacom's MTV with information on rock videos and pop music or Gannett's USA Today with category killer areas for sports statistics and game scores. Indeed, to this very day, tens of thousands of information services continue to benefit from such a system in France, supplying content to the now ancient Minitel system and sharing in a piece of France Telecom's telephone
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charges calculated per minute of use. Alas, the system no longer exists in the United States. When AOL saw its franchise under threat from Internet service providers, who from the start offered flat-rate monthly pricing, it shifted course to an "all you can eat" pricing plan — and life for content providers got a lot tougher as every other United States service followed suit. Of course, in this move AOL did not sell the poor content providers down the
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