|
|
 |
Are cheap prices and the ability to commit large resources all that matter?
|
The rush to connect Jane and John Citizen to the Internet is well
under way. Who will strike gold, and who will end up with a pan of
wet sand? One day the major on-line services are declared dinosaurs,
facing extinction at the hand of nimbler, cheaper Internet Service
Providers (ISPs). The next day, the ISPs themselves find investors
fleeing their stocks as Ma Bell weighs in with WorldNet. What's a poor
Wall Streeter to do? Are cheap prices (currently favoring ISPs, and
potentially favoring anyone with deep pockets) and the ability to
commit large resources (favoring AT&T and other large telcos) all that
matter? Based on ongoing research conducted by the HERMES project at
the University of Michigan Business School, I identify some
fundamental technical abilities and related business skills that
can be a counterbalance for large resources and cheap prices. In
fact, these will be the essential skills required of any company
hoping for long-term profitability as an on-ramp intermediary. If you
see a company mastering these, invest and hold. If you see them
falling behind, prepare for price cutting, wasteful spending,
underperformance, and demise.
|
Hold their hands
|
The newer users, already beginning to appear on the
Internet, have two important and seemingly contradictory
characteristics. They are less computer-savvy than the techno geeks
who have ruled the roost, and yet they are and will be ever more
demanding! The old-timers are happy with a TCP/IP connection, surfing
from site to site, downloading the latest versions of browsers,
helpers, plug-ins, and add-ons. They unzip, install, and tinker.
Then, a mere two months later (a virtual lifetime in this business)
they do it all over again. When things don't quite work they report
"bugs" and devise workarounds. At the end, they have a system which
usually allows them to take advantage of the latest Web gizmos.
|
New users . . . want it all, they want it now, and they want it to work.
|
The new users will demand to be at the cutting edge. Having plunked
down a fair bit to get a multimedia computer, they too want to be
Shocked (see the new GM site), framed (see the Cybercricket site), and
Rammed (see the Realaudio/NPR site). But, they do not have the
skills, time, and patience to go through the click, unzip, install, and
fine-tune grind that is necessary today to take advantage of the
latest multimedia Web wonders. They want it all, they want it now,
and they want it to work. And they don't want to have to run from
site to site, week after week, for the latest versions of all the
software. If only someone would do it for them automatically, again
and again (not just as a come-on when they first sign up). They might
even be willing to pay for this, or at least not take flight the
moment the next cheaper connection intermediary comes along.
|
ISP technical requirement #1:
Automatic Updating
|
The first technical requirement for a successful on-ramp
intermediary is the ability to keep customers continuously at the
cutting edge, without effort. Because such continuous updating
requires access to the user's hard disk, establishing trust and
confidence with the user will be a crucial business requirement. Who
will succeed? The major on-line services are already doing some level
of automatic updating (especially Prodigy) and have established some
level of trust and goodwill with their customers. However, they have
not been very nimble. Often their updated browsers are two to three
months behind what is needed to take full advantage of the newest
resources. AT&T's WorldNet will also have the advantage of a well-known and trusted brand name, and promises to ease the newbies in with
free browsers at sign up. If they can add to this a no-hands,
continuous upgrade policy, they could be very hard to beat. However,
AT&T's track record with the fast moving consumer end of the computer
industry does not inspire much confidence here. Finally, the ISPs
lack of history and brand recognition puts them at a considerable
disadvantage. To overcome it, they will need to outdo the other two
through speed and customized service.
|
Improved bandwidth is its own enemy
|
Serve 'em fast: In addition to demanding access to the latest toys,
the newer users will demand faster response times. Getting to the
multimedia pages, all stocked up with the fanciest browser apps, and
waiting, and waiting, and waiting, with nothing to show, can be very
frustrating. To some extent speed will come with greater bandwidth
(faster communication lines). But, improved bandwidth will also be
its own enemy. For the foreseeable future, it is reasonable to expect
that faster service will only cause more people to sign on. Further,
as content providers see bandwidth improvements, they will inevitably
start serving up ever more bandwidth intensive resources (more movies,
better sound quality, virtual worlds, and the like). Like
highways which continue to suffer traffic jams even as more and more
lanes are added, simply adding bandwidth will not be the answer. The
current Internet model where (virtually) every individual user must
make a separate, single trip to every content provider is simply too
wasteful of scarce resources (which will continue to remain scarce for
the foreseeable future).
|
ISP technical requirement #2:
Provide faster access through smart cachingCache space = shelf space
|
The second technical requirement, therefore, is the ability to provide
faster access to on-line content despite chronic bandwidth problems.
Smart caching of content will be crucial (storing those pages which are
most likely to be asked for by the users on a local computer operated
by the intermediary). In this model, each on-ramp intermediary will act
as a wholesaler/retailer of information (rather than products), and the
scarce resource provided by the intermediary will be cache space (rather
than shelf space). However, because the Web is so large no single
entity can hope to archive it all. The crucial business skill required
of the intermediary will be to understand the kinds of sites
its users most like to visit so fully that it can almost perfectly anticipate
where they want to go next and provide it instantly from its local
cache. Further, they will need to establish close relations with the
content providers to ensure timely updating of content, and traffic
preparedness for special events.
For example, the day after AT&T
announced WorldNet it was virtually impossible to get to its site, even
at 1 a.m. EST! Cache servers, forewarned of the announcement, ready to
serve up the content locally, would have improved matters for all
parties. The current dissatisfaction expressed by many customers
regarding the speed and level of service provided by ISPs shows that
those who master both the technical and business skill will benefit
first through greater customer loyalty, and then from "commissions"
charged to content providers (much as manufacturers pay margins to
retailers for providing access to customers in the "real" world).
|
How will our three protagonists do?
|
How will our three protagonists do in this instance? The major on-line
services have already developed some technical caching skills
although they are notorious for serving up old content. Further,
having carried most of the content on their own systems, they have
already had a chance to learn how to analyze and understand customers'
content preferences (although sometimes one wonders just how well they
are learning).
Regarding relations with content providers, much needs
to be done. Currently, there is often something of an adversarial
relationship between on-line services and content providers. New models
for this business relation will need to be developed. AT&T's WorldNet
has a great deal of corporate level experience in operating within
distributed information environments. How well they are able to
translate the experience from other parts of the corporation to this
specific situation remains to be seen. The ISPs, once again, will be
the most disadvantaged by this requirement. Effective caching can
require considerable investment in equipment. With cheaper on-line
charges a major attraction of these companies, the added expense may
prove too burdensome. Yet, if they choose to focus on microsegments
(something larger companies typically have difficulty with),
understand this niche market's site/content preferences thoroughly, and
provide faster access to just those specialized sites, such companies
could well thrive in the coming market.
|
Companies who meet the technical and business challenges will defy the downward price spiral and profit from a loyal customer base.A partnership between AT&T and AOL could prove very potent
|
In conclusion, companies who excel in meeting the technical and
business requirements set forth above will defy the downward price
spiral and profit from a loyal customer base. Examined in this light,
the market's devaluation of ISPs (as most are currently structured)
is not misplaced. On the major criteria listed above, they start
from a position of disadvantage. However, writing off the major on-line
carriers (especially AOL) is a mistake. The latter have the potential
to successfully meet several of the requirements identified above.
Finally, given AT&T's relative lack of knowledge about this market, and
the ISPs' lack of name recognition and resources, a partnership between
these two could prove very potent. WorldNet could franchise
local/niche markets to ISPs specializing in providing quick,
customized service to the local customer, while the brand strength of
Ma Bell (and other household telco names) would provide access to the
homes and computers of the coming masses.
|
|
|
