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a crash course in the evolution of business models
find the bottleneck, and own it

page four of four | previous page 

Mr. Sherman:  What are your thoughts on Net market-makers?  Are they just places to browse or will people actually buy from them?  Is that a viable business model?

Dr. Sampler:  If by “Net market-makers,” you mean B2B exchanges such as those trying to sell telecom, I think B2B exchanges will flourish, but they have to do much more than facilitate the exchange¾the exchange is the simple part.  The other part, the value-add of service around that, is the whole solution to everything from delivery and knowing where the delivery is to payments and inventory adjustment.  That means every B2B exchange or every eMarketplace is going to have to tie into the legacy systems of these different companies.  I see all these big names of the auto industry or the travel industry, whatever, getting into this and, yeah, that's fantastic, but now you're talking about legacy systems across all of these major companies which have had systems for 30,000 years, plus the suppliers.  It doesn't work easily.  I've been involved with a project with the Department of Commerce in DC, and they basically say that they don't understand how to measure the economy anymore.  We've done a lot of interviews with heads of eBusinesses and major companies, and I’ll pass on their comments to you because it's probably very relevant to what most of you are doing.  They said that the impact of the Internet on their big customers is zero.  Absolutely negligible.  Why?  Because it's such an important customer that they already had EDI relationships in place.  They monitored them and have existing customer relationships.  The Internet's changed nothing because they don't want to destroy that relationship.

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          What the Internet has done is open up thousands of new, smaller relationships.  You can see more and more companies creating the “my Dell,” to personalize it, because many small businesses have crappy systems to begin with and a crappy decision-making process.  If you put that stuff in place and let them turnkey it, it's going to be unbelievable.  Oracle is expecting something like 35% of their sales within four years to come from a small office/home office channel.  IBM says that 50% of the IT market is untapped for them, and they’re using that channel to customize services very effectively.  That's the growth area.  It’s not with the big companies, which will happen slowly.  The big growth is in areas that were not cost-viable for you before, and we see it happening in everything from consumer goods to electronics to IT services.  There’s universal opinion around that, and I think that's the real challenge for the B2B exchanges.

Mr. Sherman:  Would you discuss the impact of Internet integration on the services industry, such as law, accounting, consulting, etc.?

Dr. Sampler:  I think consulting is a very interesting model.  Clearly, the issue is how do you charge for knowledge and advice?  Every business is going to be facing that challenge.  Take stockbrokers, for example, where we used to be able to charge for the transaction and give the knowledge away for free.  What is happening in every one of those areas is that the simple or petty problems, such as doing the simple wills if you’re a lawyer, used to be the bread and gravy for many of those firms and they are disappearing to Web sites.  Now it's a $50 upload rather than a $500 charge to do incorporation papers because it's a template.  You just put in the company name and plug and chug.  They're not going to get money for the simple stuff.

          Another way that accounting firms and law firms are using the Internet, as I was saying earlier, is that it’s the cheapest form of customer interaction.  I don't have time to go see the client, but I can send them alerts and have an ongoing dialogue.  Can I have access to their books, remotely, and start to do pro forma statements in an ongoing fashion for them?  It will totally change the cost of that customer dialogue and hopefully bond them much more closely to you.

Ms. Wang:  My name is Rose Wang of Binary Consulting.  I see credit cards and electronic banking infrastructure being bottlenecked in Europe and Asia for eCommerce growth.  Do you agree with that and what do you see as an alternative strategy for them to get the eCommerce explosion that we've seen here?

Dr. Sampler:  The issue for most developing nations, and even nations like Germany, is that card penetration is very, very low.  They just don't use them.  In my opinion, the answer’s probably smart cards, and it may be the cell phones themselves.  Cell phones are able to track calls and the time of those calls, so there's no reason why, with some kind of embedded scanner, that they couldn't just make micro payment purchases through the phone.  They have that capability.  There are SIMM cards and smart cards that go into the phone, so I think you'll see some kind of smart card/debit card option evolve.  There’s something similar in this country, an automatic check clearinghouse.  Even at eBay, something like 20% of transactions don't clear because people don't send the checks.  It’s even a huge problem in this country.  I look for alternative systems like Atrix or possibly smart cards.  The smart card applications they use in Singapore are unbelievable.  You don't use a passport anymore, you have a smart card that's scanned.  I think we just don't understand smart cards in the US.

Ms. Wang:  Do you think there's a similar kind of alternative strategy developing for the B2B world?

Dr. Sampler:  There's one company doing it in the States.  I can't remember the name, but I think there will be people who will probably try things like short-term financing payment and clearing.  They'll handle that financial transaction and it will be specialized, just like the commercial banks were, but on the Net.  Since we're in DC, I think another huge area is business-to-government with its own payment and paperwork process.  If you think about the footprint of government in developing nations and in Europe, where it is potentially even more burdensome in terms of reporting and due diligence, there are huge opportunities for greasing that path.

Mr. Rosen:  I’m Mark Rosen with ShopYourWorld.  I believe it's a shift to the integrators that matters.  I think the debate between Amazon and FedEx misses the point because you're still focused on stovepipes.  The Amazons can't hack it because they still have the inventory.  They're still the old-fashioned model of buying from little men, and FedEx is still focused just on the logistic pieces.  It's about the physical and the electronic and connecting international manufacturers and buyers.

Dr. Sampler:  I agree with you about the integrators.  The issue is, will it be a new player that's the integrator or will it be one of the existing players that nabs the next step.  I think there's huge value in integration of intermediaries.  The issue is existing player versus new player, and that's going to vary by skills, industries and everything else.

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Mr. Morsberger:  I’m Lou Morsberger with Merchant Feedback Systems.  In your vision of continuous customer interaction, it would seem that a naturally favored producer in most categories of goods, such as a Sony or General Motors, could almost have a lock on every market.  Will more and more industries start to look like software where there's a huge switching cost for the consumer to move from Microsoft to another producer?  Can you comment on categories of goods where the benefit is not to the producer?

Dr. Sampler:  If there are tons of manufacturers and tons of competition, I do not want to bond myself to one; I want some intermediary that will let me switch across them.  Then the job of the intermediary is to make sure that whatever I purchase is compatible with the systems integration channel.  For certain types of transactions that are very lumpy, that's where the manufacturer can jump back in.  If you look at something like appliances, however, the real battle is around service.  Best Buy or Circuit City or Sears is saying, “Buy the service contract from us.”  That's how you link the customer in.  That's how you know when they need a new washing machine or a new freezer.  Meanwhile, General Electric says, “Hey, buy it from us.”  You see different people entering into the equation at different points of continuous customer interaction, depending on the nature of the product.  All that I point out is that the Web makes it very, very cheap, and, if you have embedded technology, the manufacturer may have a potential inherent advantage in some cases. I'm sure there will be others coming in on top of that, however, trying to do the switching process.  We're just seeing the beginning of these kinds of offerings.

Mr. Frank:  My name is Jeff Frank.  My manufacturing firm makes a product that we sell directly over the Internet.  To us, this was a very simple business model.  We went out of our way not to sell retail, so we don't have them complaining about the competition.  We have a product that we sell to commercial, non-retail customer.  They can mark it up and sell it to retail, or we can sell it directly over the Internet and save the customer 20%, still making triple the normal margin.  Now, 30% of our sales are directly over the Internet, and my question is, why does this seem to be such an unusual approach?  Why aren’t manufacturers looking to this direct model?

Dr. Sampler:  I think it's some of the factors I highlighted earlier.  Your company is fairly new, I assume, so there's a huge issue around legacy understanding of the marketplace and where you would look for these kinds of products to begin with.  Clearly, coming in today from certain commercial sectors, the Web may be a very ample place to look.  If you have existing chains of information, intermediaries and consultants who are using this channel for a decision-making purchase, part of what you have to do is re-educate the marketplace so that the decisions are occurring here, electronically.  Each channel has unique characteristics, and you look where the bottleneck is in your channel.  The intermediary points may be very different for you.  There are very few things I can tell you that are universally applicable.  It's all situational, but these are the factors you have to look for.  Your bottleneck may be in a very different place from other industries, and the newness of evolving industries may make it much more suitable for you.

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mario morino: wrap-up

Good morning.  I want to thank Jeff for what I thought was an excellent presentation.  Very thought provoking.  I'm going to try to summarize why I think it's of great relevance to what you face in trying to create the businesses you are building.

          More than anything else, as sophisticated as his presentation was, Jeff was really getting at the importance of understanding the fundamentals of your business.  If there is a criticism I would make, in general, about many of the approaches we see today¾and have seen for five years now¾it is a lack of appreciation for the businesses fundamentals.  Without naming the firms, I can give you two cases that I think are a phenomenon of the last five years that we probably won't see again.  These two businesses both got VC funding in the region, both had IPOs and both are just incinerating as fast as you can pick up the paper.  If you went back and looked at their businesses and their industries, there never was an opportunity to have a margin on their products.  It was obvious from day one, but they didn't see it, their VCs didn't see it and, because of the hype around the Net, a lot of public investors never took the time to understand that the margins were so low in their markets that there was just no further gain to be extracted.

          I challenge you to look hard at the fundamentals that Jeff has laid out.  The point he made about the impact of technology¾fast, cheap, more reliable, solving more complex problems¾that couldn't be more true.  You could have inserted those same words in all the presentations we used to do as early as 1976.

          But there is a difference. Nothing, at least in my career which started in 1964, is as profound as the change you see today.  It’s more profound than the introduction of the computer itself because, as a society, we weren't as acclimated to understanding the potential before us.  Now, technology has permeated society to such a large degree and so many more people are able to understand it, that you see many differences.  Unlike any of the other technical innovations, at least to the Industrial Revolution, the wild card is the individual nature of the Internet.  It changes all four of those issues of speed, cheapness, reliability and complexity.  The ability to assemble, either as consumers or to aggregate power as a populist movement, is something we've never witnessed before in any medium.  Irrespective of the business models we see, the client can aggregate faster than ever before and shift the power.

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          I think we're going to see a slew of changing business models because we're still in an early stage and nowhere near the maturity of its impact.  We’ve seen several phases already.  If you go back to1992, when the Internet was approaching critical mass but had not hit the commercial space, the Net itself was the element of change.  By 1993 and 1994, everybody was focused on creating Web sites for the lateral movement of data, and that became a force of change.  By the mid 1990s, up to 1997, you were seeing channel disruption for the first time.  Channel reconfiguration became the opportunity and many people never made the switch from developing Web sites to realizing that the purpose of those sites was to deal with channel issues and channel disruption.  Next, you saw the issue of collapsing the supply chain, which, again, is lateral movement, causing collapses in the system.  It broke out huge cost savings for organizations and speed-to-market on supply chain condensation.  Then came the eCRM movements, overhauling your electronic consumer relationship management array.  Today, that is almost an industry in and of itself.  I came out of a meeting yesterday morning where the conclusion was that the challenge today is the management of multiple channels.  It's not just putting IT services in; it's how do you manage a multi-channel strategy so an organization can deal with their clients from a B2B model.  I just rattled off four or five business model changes in the past few years that are profound to the commercial marketplace and therefore to the client marketplace.  It’s absolutely embryonic compared to what we'll see over the next 10 years.

          I think opportunity abounds.  The new business models create FUD¾Fear, Uncertainty and Doubt¾and I think there is enormous opportunity in the large organizations because they don't get it yet.  The ability to go into the global 300 is absolutely astounding because they're still remarkably challenged.  Although a few of them may understand this in visionary ways, you have entire legacy-based organizations that are still having great difficulty responding to these changes.  When you look at opportunity from your perspective as entrepreneurs, I would suggest that there are two very large pictures.  One is, when you understand and can map out the changing business models as well as Jeff did here, then you have to ask yourself, how does my product or service capitalize on that business model change or on some niche market of that change?  If there’s a good answer, you have a clear opportunity and that's where you should direct it.

          The other opportunity is that there is a global Fortune 1000 that is still struggling with this issue and will continue to struggle for the next 10 years.  The opportunity to go in as interpreters and advisors is absolutely remarkable.  The sector made up of eBusiness advisors has been hit lately, but that’s because we're actually not sure where the sector is.  What's happened is that the sector is not bad at all¾it is remarkably strong¾but you're seeing the sector go mainstream.  That's all that has happened.  What we knew as “the Internet space” is becoming the classic IT services space with a premium on the top, and that premium is in being the first to take advantage of the models of channel distribution strategy or organization.  People are having an enormously difficult time trying to understand how to get their product to a changing marketplace where the power has shifted to the client.  This phenomena of a power shift to the consumer dictates the price for the product being used.

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          Jeff’s other point that I'd like to touch on is how the decision has moved outside the channel.  At my old firm, Legent, we had the benefit of having Max Hopper on our board.  Max was the guy who put the Sabre system together way back at American Airlines.  I had the pleasure of asking him about the changes in terms of system design when you saw all these fundamental shifts on the network.  What I'm talking about here is the enormous complexity we now face in delivering a technology-enabled solution to a client.  Max said that when they first did Sabre it was very challenging, but simple in concept because they were writing a system to provide a ticket where everybody who touched the ticket was an American Airlines employee.  That was phase one.  Phase two, which was more prominent, was when that network opened up to encompass travel agents throughout the globe.  That caused a significant change to the design in scope, in technology, in industrial strength engines, etc., and there were legal issues, you may remember, about whose tickets got posted first, However, American Airlines was still such a dominant supplier that they could dictate system control.  It changed massively when it was broadened to the whole leisure and travel industry where the client reigns supreme.  They went from American Airlines in the '70s to travel agents in the '80s, to clients in the '90s and the amount of effort it takes to deliver that solution is probably a magnitude of hundreds of times greater.  That’s why, as companies, you have such enormous opportunity.

          There are clearly niche opportunities and market opportunities to develop around the new business models, but do not underestimate what Enterprise America, Enterprise Europe and Enterprise Asia will go through to make this transition in the next 15-20 years, as well as the new markets that have opened up because of the scalability that Jeff talked about and the effects on small and mid-range businesses.  Look at what the markets will now demand, such as information in real-time.  For example, just before I came up here I received an email announcement about all the IPOs that have been pulled in the last 48 hours.

          As entrepreneurs, the number one point is that you have to clearly articulate your business model and show a compelling understanding of how that model responds to change.  That will go a long way in helping investors and others have great confidence in your approach.  If you look at America Online or Capital One, they saw a new business model and became a dominant provider with it.  There will be more companies like that.

          The second point is to become part of the system of organizations that will help organizations understand this change.  There is a constellation of companies that are basing huge investments around mining the global 1000.

          In both cases, when you look at your business models, know whether you are capitalizing on a new business model, or whether you are a support agent or intermediary that's going to help other people advance that model.  The ability to articulate that to the venture world and to your prospective clients is going to become remarkably important.  It probably already has been to the realization of market valuations, on how money will change and whether or not you'll get funding going forward.

          Jeff, your words couldn't have been more timely and they have tremendous relevance to this group.  Thank you very much.  Good luck, everyone, and thanks for being here.

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