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Managing the Internet Business Model

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For better or worse, the Internet is here to stay, says Cooper Smith. It's time to create entirely new business models based on all of these relatively new commercial technologies.
Placing special emphasis on a comprehensive approach combining organization, people, process, and technology, Harris Kern's Enterprise Computing Institute is recognized as one of the world's premier sources for CIOs and IT professionals concerned with managing information technology. To assist you in building IT infrastructures that are well-planned, well-deployed, and well-managed, the principals of Harris Kern's Enterprise Computing Institute describe their experiences and proven techniques in a wide range of books, white papers, and articles. The following article is one in an extensive series that describes all the key aspects of building and managing world-class IT infrastructures[md]infrastructures in which people, process, and technology are closely aligned.
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Despite the current turmoil in the Internet landscape and the business pressures that all technology companies are presently facing, I think we all realize that, for better or worse, the Internet is here to stay. However, we're still undergoing a kind of reformation as we learn to stop trying to make the Internet fit into accepted business models. Instead, we must understand that we have to create entirely new business models based on all of these relatively new commercial technologies.

As the Internet continues to evolve, it will become much more than just "web sites." Instead, it will begin to realize its potential as a network, not just islands of bundled information, commerce sites, and random multimedia. The Internet will begin to replace the world of two-dimensional media with the three-dimensional world of poly-media. In other words, as the Internet becomes more and more ubiquitous, the average user will be connected not just to information and media, but in a variety of ways for communication and entertainment.

All information, media, and services will eventually go digital. As this change progresses, the devices we use for access will grow to include everything from cellular phones to refrigerators. But as the ease of accessing information increases, so do the problems of creating, correlating, and distributing this information all over the world. The key to any network is its content, whether that content is simple voice-to-voice communication or the latest foreign exchange rates flowing to day traders as they sit on remote beaches with their wireless PCs.

Today's portals will become tomorrow's gateways of information. The portal concept of the Internet was based on a single "sticky" site aggregating content, information, and services. This idea followed a traditional media model of basing revenue on the size of the audience. This business model is adequate for the 2D business model, but leaves a great deal to be desired for the 3D model based on the poly-media concept.

The 2D Media Model

It has been relatively easy to measure the success or failure of any mass media business over the last century. Print media relies on the number of readers. The electronic media, television and radio, rely on statistics and ratings. Movies and plays tally the box office. These are straightforward linear measurements, with the degree of success—usually dollars and cents—being directly proportional to the number of people reading, watching, or participating. A dollar a head is a dollar a head. If 10,000 people show up for a speech or concert at $1 a head, you have $10,000. If you spent $5,000 to host the event, you have made $5,000 profit. That's the kind of cut-and-dried business rules to which traditional media prescribes.

Electronic media is a bit more complex, relying on statistics and mathematical extrapolation to determine who's watching, listening, or participating at any given time. Since television and radio are broadcast to the "masses," and not by copies, tickets, or some definitive number of units created and sold, it comes closest to the realities of the Internet. However, even with electronic distribution, radio or television products or content are distributed at a set time in a set way that the intended audience can access with the necessary equipment. We need only "sample" a fixed group at a fixed time to see what they're doing to be able to extrapolate what everybody is doing at that set time, give or take a few degrees of error.

This is what gives traditional electronic media its two-dimensionality; at a certain time you can expect a certain product. Consumers can then be easily measured at that time to register their degree of consumption. But the Internet is not a broadcast medium. Its content is available 24 hours a day to anyone with access to the Internet. This means that anyone from anywhere can do just about anything at any time. This is much harder to quantify than calling a group of homes in a certain area at 8:00 every night.

The Internet can only track "impressions" and "click-throughs," and some companies have been able to develop very successful business models based solely on their ability to track these statistics accurately. But, unlike traditional 2D business models, it's a lot harder to turn impressions and click-throughs into hardcore revenue. Why?

Following are the major constraints of a 2D business model:

  • Dependence on "stickiness." This principle requires users to spend considerable amounts of time at a particular site. This is fine for heavy users of chat rooms, but most Internet users "browse" heavily and frequently.

  • Closed system model. Although most web sites are actually conglomerations of contributed content, shared resources, and outside service deals, most still try to follow a traditional business model of reaching a specific target audience, generally a consumer group or the widest possible audience of all.

  • Information overload. Most web sites, whether they're e-commerce sites or online communities, depend on features and services to keep an audience. This setup lends itself to web site after web site looking and feeling pretty much the same, without any real differentiation of content. This makes it much harder to attract a "target" audience.

  • Distributed traffic. Unlike traditional 2D models such as those of television, radio, movies, and so on, it's difficult to actually measure a Net audience at any given time. Users of sites come and go from all over the place. Some web sites require registration to define actual users, but in some cases this practice prohibits some users who don't want to register and give away personal or even impersonal information.

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