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© 2003 UMFK.

Network Utility Provider

internet business models

text and cases

Tony Gauvin

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© 2003 UMFK.

Overview

• Definition, Categorization, and delineation

• Network Utility Economics

• Establishing Standards– Key factors

• GBF?

• Winner take All

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© 2003 UMFK.

Definition

• Software programs that connect users with destination websites or with each other– Downloads and/or plug-ins– Often free in order to capture dominant market share– Attempts to develop standards

• Example– Flash– Adobe Acrobat Reader– America Online ICQ (Instant Messenger)– Real Player

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Categories

• Media Players– Streamed media– Downloaded media

• Communications enablers• E-wallets• Common Characteristic

– Provider must mobilize a network of users– exploit a network effect

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Some Hybrids

• At times NUP create portals that promote a new media– Shockwave.com

• Free games• Animated short features

• At times online portals create Network Utilities to create stickiness– AOL Instant Messenger & Net2Phone– MSN Messenger

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Economics

• Similar to Online Content Providers– Significant upfront fixed costs– Minimal variable cost of distribution

• Different in that while OLCP’s seek advertising revenue; NUP’s seek revenue by selling server software and authoring tools– OLCP need more customer to increase Advertising revenue (more

eyeballs)– NUP want to create a dominant standard (“Highlander model”

>>there can be only one!)

• We look at Media Payer economics– Adobe, Macromedia, RealNetworks

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Sources of Revenue

• For Media Players– Server software, Authoring Tools, Professional

Services• Largest component• 70% for RealNetworks in 2000

– Premium versions of the “free” players• RealPlayer Plus• Adobe Business Tools

– Advertising • Real.com $ shockwave.com portals• Free Client software has advertising panels

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Cost Structure

• High Gross margins

• High R&D– 20% Adobe, 25% Macromedia, 22% Real

Networks

• High sales & marketing– 32% Adobe, 43% Macromedia, 40% Real

Networks

• G&A tends to be fixed around 9-12%

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Profitability

• All 3 Companies are profitable– They are 3 survivors form a larger pool – Operating income as a % of revenue

• 9% for RealNetworks

• 12% for Macromedia

• 31% for Adobe

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Establishing a Standard

• De Facto standard created when critical mass of users achieved • Key factors

– Price• Cheaper than free?

– Launch and Upgrade timing• First mover or best product?• When to upgrade player and/or server (Chicken and egg)

– Backwards Compatibility• Must be evolutionary not revolutionary

– Compatibility with Rival Standards• Leverage existing user base • Depends on whether or not you are the leader

– Microsoft does not do PDF– Adobe does Flash

– Interconnection• AOL Instant Messenger vs. MSN Messenger

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Key Factors (con’t)

• Segmentation– One-size fits all or target specific customers– Superior products tend to win specific segments

• Pricing– Browser wars –Free IE or $ for Netscape– Discount server software and authoring tools?

• Distribution Partnerships– Have Content Providers and Portals encourage downloads of free players– Co-brand

• Software Partnerships– IRS uses PDF

• Content Aggregation– Websites with compelling entertainment media

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© 2003 UMFK.

GBF

• Network effects– By definition NUP’s have strong network effects

– “Users beget Users” First Mover advantage

• Scale Economics– High fixed component that get amortized over more

sales

• Retention Rates – Familiarity with authoring tools

– Communities of users

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© 2003 UMFK.

Winner take all!

• GBF is a strategic Imperative for NUP's• Racing Behavior

– Spend heavily• Marketing and R&D

– Aggressively pursue partnerships– Preempt competitors

• Downside– A standards battle between closely matched

competitors leaves one BROKE winner and one BROKE loser