PRINT THIS PAGE The internet as a real economy
05/03/2008. Source:IVCJ (Israel Venture Capital & Private Equity Journal). Shai Tsur, Giza Venture Capital
E-commerce business models developed by creative entrepreneurs are growing rapidly. In this IVCJ article, Shai Tsur of Giza Venture Capital examines online businesses today and relates how they have moved into the mainstream economy. Internet entrpreneurs and investors face the question of whether the industry is in another bubble period. This question is understandable – a remnant of sorts from the late 1990s and the beginning of this decade when many companies received funding despite having no viable means of generating revenue. Whether or not we are currently experiencing another bubble remains to be seen, but one thing is clear: In the years since the original Web bubble burst, the fundamentals underpinning the Internet economy have changed dramatically. The Internet has transitioned into a mainstream technology. On the technological side, broadband adoption continues to grow exponentially, and in many parts of the Western world fast Internet is now the norm rather than the exception. As a result, many Web services (video delivery being the obvious example), which were considered futuristic only five years ago, are now commonplace.
Internet-based business models have also matured from the bubble period when lack of a critical mass of users and absence of an effective delivery platform inhibited the transition from a purely eyeball economy to a real one. This transition is now well underway, and it is worth examining the major trends and developments in online B2C models to get a clearer picture of where the Internet economy is headed.
E-commerce achieves wide acceptance
E-commerce was the first business model to generate significant revenues on the Web. Over the past decade, it has continued to develop and mature. In 2006, online consumer spending in the US totaled $170 billion and is expected to reach $200 billion this year. Consumers now routinely shop online for everything from clothes to electronics to used cars.
We are seeing a number of significant trends:
- The fast growth of so-called "click and brick" retailers, real-world stores that also sell online. Amazon remains the world’s largest e-tailer, while the online presence of Staples and Office Depot – occupying the number two and three spots – is growing, and Wal-Mart online sales are surging as well. The ability of buyers to return online purchases to a local store has markedly lowered the barrier for making purchases on the Web.
- Emergence of "mom and pop" stores online. Smalland medium-sized retailers are currently the fastest growing sector of the online retail economy. Many of these businesses cater to niche markets. These e-tailers either utilize their own Web sites or else online marketplaces such as eBay, Amazon, or Yahoo! Shops (or often a combination of all these) in order to sell their wares. There are currently more than 600,000 fixed merchandise stores on eBay alone, which represent 39 percent of the company’s sales volume.
Market maker power yet to be tapped
Online market places are a significant feature of the Internet economy. Over the past decade, eBay has helped transform the world of SMB ecommerce. But we are seeing other market makers emerging that have also significantly impacted areas of online business.
Harnessing the power of the Internet to disintermediate and reduce information asymmetry has proven to be a highly disruptive economic factor, certainly in the B2C world. Over the past decade, industries as diverse as travel and music have been irreversibly altered by the new online world. This has forced middlemen in these industries (travel agents, etc.) to find new ways of competing.
In recent years, we have seen significant transformation in the business of auto sales, especially second hand cars, and in real estate. Used cars now constitute eBay’s most significant sales category and account for roughly one-third of eBay revenues. In the real estate world, home price comparison sites such as Zillow and Edgeio have started to make important inroads into what was once the exclusive purview of realtors.
The real power of online marketplaces has barely been tapped. There is still tremendous potential for helping offline businesses online. Locally, companies such as Kasamba have shown the value in providing an online market space for professional advice. This trend will likely continue, greatly expanding the economic potential for consultants and other service providers.
Advertising is surging
The Web is driven by advertising, which is a major change between the Internet circa 2000 and the Internet today. Primarily as a result of Google’s Adwords and Adsense technologies, all Web site owners – not just the major ones – have the ability to monetize their online real estate. In addition, new technology is enabling better and more relevant advertising in places where it never existed before.
Online advertising is expected to grow from $19.5 billion in 2007 to over $60 billion by 2011. Despite this phenomenal growth, online advertising still represents only a small fraction of total advertising expenditures. Even in 2011, Internet advertising is projected to reach only 9 percent of the total.
In the coming years we can expect to see the following:
- Better contextual and targeted advertising. Companies are seeking improved technology to help them understand users and provide advertising that speaks to directly to them.
- New real estate. Expect to see an increase in online video and mobile device advertising.
- New advertising types. These will span from pre- and postroll video ads to better interactive technology to contextual link ads (such as those offered by Kontera).
Virtual economies
One of the most intriguing new areas for business models is ‘virtual worlds’. These have introduced new services – protovirtual economies, which did not previously exist in the offline world. To some extent, these can be characterized as games, but their revenue models have developed into much more.
Virtual economies can be found in online worlds such as Second Life, massive multiplayer online role playing games (MMORPGs) such as World of Warcraft, and avatar-based sites for children, such as Habbo Hotel.
All three types of sites charge monthly subscription fees from users. But, in addition, each is fostering the development of what might be termed "real virtual economies." They are "virtual" in that they exist inside these online worlds, but "real" in that they are tied directly to real world dollars. The best example is Second Life, whose users can buy and sell real estate inside Second Life and pay with Linden dollars – Second Life’s currency. Linden dollars are acquired by paying real dollars, and some entrepreneurs have reportedly made healthy profits brokering real estate deals in this online world.
Another interesting virtual economy has sprung up in online sites aimed at children and teens. On sites such as Penguin Café and Stardoll, users have online avatars (penguins, dolls) which interact with others. Children can buy their avatars clothing and accessories. In fact, the Finnish site, Habbo Hotel, reports that it sells more furniture worldwide than Ikea, even if it is virtual furniture.
As the online economy grows, the range of business models – including some that do not exist at all today – will likely continue to evolve and mature.
This article first appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
|
