IDEAS
MANAGING IN THE MARKETSPACE: THE VIRTUAL VALUE OF M&A
ARUNAVA SINHA

12/07/1998
Business Today
164
Copyright 1998 Living Media India Ltd

It's not just the first megadeal in the marketspace. What the $4.20- billion acquisition of Netscape Communications Corp. (www.netscape.com) by America Online (AOL; www.aol.com) has created is a new model of value-capture while doing business on the Net. Its basic premise is simple: occupy the space closest to the customer.

A time may come when Web-based marketing will resemble the marketplace we're familiar with in one crucial respect: offering complete freedom to the customer to use any route to enter it. For now, and, conceivably, for some time to come, this access is not freely available to her. It requires both a technology and a channel-neither of which is entirely free.

The technology and the channel, respectively, are just what Netscape- which invented the Web-browser, but lost the lead in that business to Microsoft-and AOL-which invented on-line services, but has seen some of its business taken away by smaller players-were selling all these months. Now, the pooling of their resources will give the post-Netscape AOL a firm grip on that critical link between the customer and the marketspace. Its importance cannot be underestimated: it is not only the entry-point for the buyer-and her payment-it is also the exit-route for the products, services, and information that e-merchants sell on the Net.

Just why does AOL need Netscape since it is already the world's largest Internet Service Provider? The answer: Netscape brings in die- hard fans of its browser, Navigator and Communicator, who can now be lured in through a combined package. To be sure, AOL-incorporating- Netscape represents a high point of many trends in the Net business. After all, the high stock prices of several hot start-ups could not have sustained themselves unless these companies showed profit-making potential in, at least, the medium term. Those that don't will, inevitably, have to allow themselves-or, more precisely, their ideas-to be purchased by moneyed players.

However, the specific space in the virtual value-chain from the customer to the corporation that the twosome-turned-superpower will capture also indicates where the greatest value can be added, and, arguably, the greatest profits made. That's because, as Web-businesses proliferate, competition will force prices to plummet. Infobusiness guru Kevin Kelly even predicts that all companies will be forced to offer their content free on the Net, and find other means to make money. However, the one part of the chain where no one is talking of free services is in offering connectivity. Or, the point that is closest to the customer. Control that-and the competition will fall by the wayside. That, virtually, is the message of this merger. Arunava Sinha

BAN(ISHING) THE BANNERS

Banner advertising-streamers that run across the top of Webpages-was doomed. With click-through rates of less than 2 per cent, it was only a matter of time before it was replaced by advertising vehicles that were more accountable. One option is a badge that can be located anywhere on a site and is, basically, a brightly-coloured thingamajig. To really substitute an advertising vehicle, though, one has to understand its use. Banner ads are primarily used for business-to-business advertising; most b-to-b banners allow users the facility to order. In effect, once the initial contact was made, banner ads were viewed as e-commerce facilitators. Thus, the ideal approach seems to be two-tiered: use badges to attract buyers, and once they become regular customers, set up a microsite. A microsite is a Website located on a customer's Website, or an exclusive site that can service the needs of the customer. Microsites can even be located on a company's intranet, making it easy for the company's purchase department to place orders. Ford (www. ford.com) and Silicon Graphics (www.sgi. com) already host such sites on their intranets. Since the microsite is different from the company's main site, it can build as many as it wants. And make every customer feel special.

THE REAL ADVANTAGE

Do start-ups have an edge over existing companies-particularly those in traditional businesses-when it comes to e-commerce? Most people believe they do. They are leaner; are backed, more often than not, by a bunch of aggressive venture capitalists; adaptable; and somehow seem to attract the kind of talent it takes. And with the Initial Public Offering (IPO) boom on Wall Street, the Net, everyone expected, would become the domain of newbies. Barnes & Noble's (B&N) acquisition of Ingram, the book distributor that supplies more than 60 per cent of Amazon's books, heralds the emergence of a new paradigm. The context? Competition has increased the pay-back periods on investments, and the bottom has fallen out of the IPO market for hi-tech firms. And with profits nowhere in sight, companies have been forced to focus their resources at increasing the quality of the customer's on-line experience. Neither Amazon nor B&N has registered profits from e- commerce, but B&N's operations in the real world-the company owns the largest chain of bookstores in the US-are profitable, which made it easier for the company to acquire Ingram. Clearly, companies that have profitable real businesses can use them to subsidise virtual initiatives.

NINE WAYS TO MAKE THE NET WORK FOR YOU

It is easy to dismiss new media. But, don't forget, the list that has been laughed at includes radio broadcasting, network TV, and satellite TV. Before you dismiss the Net as something irrelevant to your company, here are 9 trends that demonstrate that the Net works. Ponder. Or perish.

RETAIL SALES. A third of Dell Computer's sales are now made through the company's Website, doing away with the cumbersome retail route that lowers its margins. Dell expects that figure to reach 50 per cent by 2000. (www.searchpad.com)

BUSINESS-TO-BUSINESS SALES. Market research firms predict that the real money in e-commerce lies in transactions between businesses. Cisco Systems has on-line sales of $3 billion annually. And more than 50 per cent of its products are delivered on-line. (www.cisco.com)

REDUCED PURCHASING COSTS. A dollar saved boosts the bottomline just as well as a dollar earned. Microsoft's on-line purchasing system paid for itself in less than a year, adding between $8 and $11 million to the company's bottomline last year. (www.net-profit-center.net)

REDUCED CUSTOMER SUPPORT COSTS. Putting customer support Q&As on a Website or, still better, maintaining an interactive question-room on the Website can be more cost-effective than staffing a call centre. Especially if there is a critical mass of customers. (www.helios.com)

SUBSCRIPTION FEES. Until the Wall Street Journal Interactive came along, the only Websites with any chance to profit from subscription fees seemed to be those offering 'A' content. With the success of this interactive, several content-providers are revisiting the subscription issue. (www.wsji.com)

ADVERTISING SALES. If your site attracts a large number of surfers, you can sell banner advertising on it. Or you can, through a banner exchange or bartering scheme, post your own banner ads on other high- volume sites. (www.onsale.com)

REDUCED PUBLIC RELATIONS COSTS. Since publicity campaigns can be expensive, many companies are cutting costs by putting their press- releases on-line. They may send a small packet to their target audience, and direct the recipients to their Website. (www.prnewswire.com)

REDUCED MARKET RESEARCH COSTS. Unlike traditional methods of market research, the Net provides a view of the customer, up close and personal. So much so that a new brand of customer research, Technographics, has emerged. (www.forrester.com)

REDUCED RECRUITING COSTS. Recruiting through the Web can be rewarding for smaller companies. They can put on a 'big company face' via a Website . And almost all the major Websites across the world offer a link to 'jobs.' (www.saja.com)