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The Battle For Internet Consumers
Why Is Doing Business On The Internet Becoming Like Jurassic Park?

(Bethesda, MD — November 11, 1999) Everything that's big, old and slow-moving isn't necessarily a dinosaur. That's a lesson netpreneurs would do well to keep in mind before prematurely writing off competition from traditional businesses.

More and more mainstream consumers come to the Net everyday, and that means that buying and behavior patterns are changing radically. At yesterday's Netpreneur Program Coffee & DoughNets meeting, Mary Modahl, Vice President of Research at Forrester Research, explained some of those changes, and the implications they have for .com companies. The upshot? Online businesses must prepare to fight for survival as the competition from traditional companies heats up.

Modahl is the author of the soon-to-be-published Now or Never: How Companies Must Change To Win The Battle For Internet Consumers which explains Forrester's Technographics® model for understanding how people use the Internet. Where traditional demographics and psychographics give only a sketchy picture of consumer behavior, technographics is a predictive mechanism that shows how different kinds of people are likely to adopt and use a given technology.

According to Modahl, mainstream consumers are different from the early adopters that most .com's have catered to. Yet she points out that "the total disposable income of the two groups is almost the same, so if your company is so 'early adopter-oriented' that you can't appeal to the mainstream, you are only addressing half the market." And that doesn't even include a third group of consumers, the "laggards" who resist technologies, but will probably get to the Net eventually.

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Technographics divides consumers into 10 sectors, but Modahl focused on two main characteristics that separate early adopters from the mainstream: adventurousness and income. Early adopters tend to be more excited about and willing to explore new technologies—what Forrester calls "optimists" as opposed to "pessimists" who are technology resistant—and they tend to be wealthier with household incomes above $65K. Mainstream consumers, it turns out, fall into one of two groups: low income optimists, such as young people just out of college, and high income pessimists, usually older people with little compelling reason to use a new technology. Each group is looking for different things, and sometimes traditional businesses have more to offer them, even online.

"What you see," said Modahl, "is the de facto assumption that the .com's have won this battle, that being a startup is much better—that you are freer, can move more quickly and are more exciting. These traditional companies are flat-footed. They are slow and the management doesn't get it. That's now conventional wisdom in our marketplace, but I believe that the market is beginning to shift. Traditional companies are not as DOA as they may appear."

Modahl cited companies that have done a good job targeting mainstream consumers online, such as startup theknot.com, which specializes in the newer challenges of post-modern weddings, and traditional financial services firm Fidelity Investments which satisfies the need of high income pessimists for a more familiar venue than what they find at E*Trade or Charles Schwab. While Fidelity may not get the press or have the cutting-edge image of an E*Trade, it's sobering to remember that the company has over $200 billion under management compared to E*Trade's $7.8 billion and Schwab's $81 billion.

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Giants like Fidelity and Disney may not be dinosaurs, but they do have teeth and they're going hunting on the Internet.

Modahl went on to explain some of the comparative advantages of startups—including funding, leadership, organization, lack of channel conflict and technical skills—and those of traditional businesses—including established brand identity, customer base and physical presence.

Speaking to this group of envelope-pushing Internet entrepreneurs, Modahl pointed out "We look at companies like Amazon.com and Yahoo! and those guys have done incredibly well with branding. We know of companies like Mercata, but mainstream consumers have no idea who most of these .com companies are. There is nowhere near the kind of brand equity that exists in a Victoria's Secret or a Wal-Mart. Among early adopters there is a willingness to try out new companies, but among mainstream consumers there's much less of a willingness to do that, particularly the high income pessimist groups."

Modahl explained the two primary ways in which traditional companies are tackling E-markets. In the first, the brontosaurus evolves into a mammal through wholesale transformation to an Internet-focused company. Intuit has done this with its TurboTax product—even though it didn't have to—in order to capture the burgeoning electronic tax filing market. Charles Schwab has also done it in the personal investing space, proving the threat to .com's offered by traditional businesses. E*Trade may have been the pioneer in this market, but Schwab has successfully remade itself into the largest online broker.

The other method by which traditional businesses are moving to the Net is through risk-balancing strategies that involve taking a business unit, perhaps combining it with VC money, and spinning it off. Disney has done this better than anyone, combining ESPN Sports Zone, which it acquired when buying ABC, with InfoSeek to form the foundation for what is now the Go Network, one of the top five media properties on the Internet.

Modahl explained, "[Disney] controls the brands at every point, and that's been a very important part of their strategy as a traditional company. They have also been able to support Internet businesses fully. If you look at Disney television, you see Go Network promoted on a regular basis. You can't buy that from Disney if you are not part of the Disney empire. You can't get marketing in the Disney theme parks unless you are owned by Disney."

Modahl went on to talk about some of the implications for .com's of this stampede by traditional consumer businesses to the Net, such as the need to create multi-channel brands and the pressure to scale up fast. And while she was enthusiastic about the still vast potential for startups, she urged netpreneurs not to take their own press releases too much to heart.

".com's, have taken the early lead on the Internet," she warned, "but traditional companies can still win. You see this definitely in the financial services market and in the travel space. I would say the airlines have been the absolute biggest winners in the travel space. You definitely have to take into account that traditional companies will be among the top two or three players in almost every category. Startups really need to build management, brand and presence to win, particularly with the consumer."

Copyright 1999, Morino Institute. All rights reserved.

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