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Changing Business Models

To demonstrate their nimbleness, companies started to modify their businesses. Venture capitalists with mounting losses in their portfolios among both pre-IPO and public companies started encouraging mergers. Wal-Mart.com, backed by Accel Partners, purchased the assets of HomeWarehouse.com. Similarly, Idealab company Paymybills.com bought out another Idealab-backed company, Payme.com.

Consolidation through mergers and acquisitions became the norm, replacing IPOs and heavily funded start-ups as the operative mode for the corporate finance world. By the end of 2000 and into 2001, many highflying Internet companies were down in the penny-stock trading range, and some faced delisting from NASDAQ. Huge drops happened across the board, but the heaviest came in consumer-to-consumer (C2C), business-to-consumer (B2C), and eventually business-to-business (B2B) market plays.

All ships were being lowered by the tide. Those that were "relatively" healthy appeared to be infrastructure suppliers in enterprise architectures, network hardware, and data center management. But they, too, would begin to see softening in market valuations.

The landscape was becoming flooded with layoffs and bankruptcies. By early 2001, the bloodbath was painful, especially in Silicon Valley, where newly-minted millionaires started papering the job market with their resumes.

Carpenters have a saying: "Measure twice, cut once." These craftsmen know that accuracy reduces waste and saves time. Most consider their tape measures, levels, and squares to be power tools, even though these devices are largely mechanical or without moving parts. Moving up the skills ladder, architects use blueprints and renderings to guide construction of a building.

In electronic commerce, we also have tools—powerful tools. Some tools and crafts measure site performance, as noted above. Some measure corporate performance. Some measure markets. And we also have templates and business forms, called business models, which provide us with architecture to guide us in constructing a business . . . often in market areas where none existed before.

This is part and parcel of what makes online commerce new, fascinating, and exciting. Most of these numbers can be quite useful. Victoria's Secret attracted almost two million site visits to the fashion show in Cannes in 2000 without much of a hiccup. The first time around in 1999, however, higher than anticipated traffic brought the site to its knees.

And in all that traffic, as with those who went to NBCOlympics.com site, there were visitors who were meaningful and within the target zone for the merchant. But there were many more who were not. In anticipation of heavy traffic, Victoria's Secret correctly forecast a need for a robust infrastructure of servers, software, and communications services that would be scalable. This is not a trivial expense.

Does it make sense, however, to have the needle pegged at high site-visits with only a small number being target customers? Does a million-plus page views a day justify the investments to support traffic consisting of an audience where more than half, conservatively, will never influence a purchase decision, let alone make a purchase?

Investments to build the Victoria's Secret, IBM, and NBC brands are huge in time and dollars. To gain customer trust, confidence, and exposure to generate awareness to get customers to these sites are also considerable feats. These investments in site design, navigation, infrastructure, branding, and awareness can often push one important metric—customer acquisition costs—through the roof!

When those making decisions about whether or not to invest in these companies see little or no return, they pull back on their investments. When management sees internal rates of return for invested capital dropping or turn negative and stay there consistently, they withdraw support for projects. When suppliers and service providers see customer volumes drying up, they begin to look for new strategic partners.

And when the business model du jour loses favor and becomes stale to users, they look for the next category for online news, information, education, and entertainment. Fickle as they rightly are, investors vote with their feet.

Shakeouts are inevitable. They are even healthy, though painful, for those caught in the up and down drafts. Those that survive do so for several reasons: first, management knows how to manage in tough times; second, the business is founded on a reliable architecture and solid business principles; third, there are often voices in the wilderness within the company who just might be in touch with the realities of the day and hold a vision of what the future "really" holds; and fourth, they are nimble enough to recognize when a business model needs modification.

In the latter instance, management uses internal and external metrics to give them early warning clues about everything from sea-state changes to impending economic tsunamis. Their peers often consider the few who are tuned in to their businesses and the markets as idiot savants.

A guide on how to envision, set up, and manage a business for the bottom line is what this book is about. It is about finding the right business model, or architecture; determining the operational aspects that provide the most useful benchmarks for success and then measuring them. It is about metrics, models, and the experience to use them.

In the rest of this chapter, however, we look at broader Internet trends with a new view to the future.

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