Business Models on the Web | Professor Michael Rappa http://digitalenterprise.org/models/models.

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MANAGING THE DIGITAL ENTERPRISE • MICHAEL RAPPA Jump to...

BUSINESS MODELS ON THE WEB

Business models are perhaps the most

Join the discussion: discussed and least understood aspect Hear the podcast:
of the web. There is so much talk about
Discuss business
models in the Forum.
how the web changes traditional
business models. But there is little
clear-cut evidence of exactly what this
means.
Audio | Transcript
In the most basic sense, a business model is the method of doing business
Things to watch:
by which a company can sustain itself -- that is, generate revenue. The
business model spells-out how a company makes money by specifying Things to read:
__/ 05-17-2006 \__ where it is positioned in the value chain.
Users, Not Money: the Important Note
Google Business Model Some models are quite simple. A company produces a good or service and
Marissa Mayer
sells it to customers. If all goes well, the revenues from sales exceed the Learning Objectives

__/ 05-01-2002 \__ cost of operation and the company realizes a profit. Other models can be
Review Exercises
How Does Google more intricately woven. Broadcasting is a good example. Radio and later
Actually Make Money?
television programming has been broadcasted over the airwaves free to __/ 01-27-2006 \__
Larry Page
anyone with a receiver for much of the past century. The broadcaster is Digital 2.0: Powering a
Creative Economy
__/ 02-03-2006 \__ part of a complex network of distributors, content creators, advertisers
World Economic Forum
Interview with Craigslist (and their agencies), and listeners or viewers. Who makes money and how
panel discussion with
CEO Jim Buckmaster
David Kirkpatrick
much is not always clear at the outset. The bottom line depends on many John T. Chambers
competing factors. William H. Gates III
Eric Schmidt
__/ 04-21-2005 \__ Niklas Zennström
Open Source Business Internet commerce will give rise to new kinds of business models. That
Models: Interview with much is certain. But the web is also likely to reinvent tried-and-true __/ 09-30-2005 \__
Sybase CEO John Chen
models. Auctions are a perfect example. One of the oldest forms of What Is Web 2.0:
Dan Farber
Design Patterns and
brokering, auctions have been widely used throughout the world to set Business Models for the
__/ 02-02-2005 \__ prices for such items as agricultural commodities, financial instruments, Next Generation of
Utility Computing: and unique items like fine art and antiquities. The Web has popularized Software
Interview with Tim O'Reilly
Sun Microsystems CEO the auction model and broadened its applicability to a wide array of goods
Jonathan Schwartz and services. __/ 01-14-2004 \__
Dan Farber
The Utility Business
Business models have been defined and categorized in many different Model and the Future of
__/ 10-06-2004 \__ Computing Services
Innovating at Amazon
ways. This is one attempt to present a comprehensive and cogent
Michael Rappa
Jeff Bezos taxonomy of business models observable on the web. The proposed
taxonomy is not meant to be exhaustive or definitive. Internet business __/ 07-04-2005 \__
__/ 06-05-2004 \__ models continue to evolve. New and interesting variations can be expected The Abundance of
Strategy for High Simple
Tech Companies
in the future.
Business Models on the
Michael Cusumano World Wide Web
The basic categories of business models discussed in the table below Michael Featherstone
__/ 03-02-2004 \__ include: Allan Ellis
Yahoo: Past, present
and future __/ 05-27-2002 \__
Brokerage
Jerry Yang The Role of the
Terry Semel Advertising
Business Model in
Infomediary Capturing Value from
__/ 09-26-2002 \__ Merchant Innovation
A Conversation with Henry Chesbrough
Manufacturer (Direct)
Michael Dell Richard S. Rosenbloom
Affiliate
__/ 02-27-2002 \__ Community __/ 11-00-2001 \__
New Business Models Subscription Migrating to Profitable
for Web Services Electronic Commerce
Don O'Toole Utility
Business Models
Jeanne W. Ross

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Business Models on the Web | Professor Michael Rappa http://digitalenterprise.org/models/models.html

More lectures... Michael R. Vitale

The models are implemented in a variety of ways, as described below with Peter Weill
examples. Moreover, a firm may combine several different models as part
of its overall Internet business strategy. For example, it is not uncommon
Case studies:
for content driven businesses to blend advertising with a subscription In the news:
Amazon.com model.
America Online __/ 10-18-2006 \__
ChemConnect Business models have taken on greater importance recently as a form of A business model
Claria VCs love
Classmates
intellectual property that can be protected with a patent. Indeed, business Katherine Heires
Coolsavings models (or more broadly speaking, "business methods") have fallen
Counterpane increasingly within the realm of patent law. A number of business method __/ 04-19-2006 \__
Craigslist Mashups for fun--and
patents relevant to e-commerce have been granted. But what is new and
Dell Computer profit?
DoubleClick novel as a business model is not always clear. Some of the more Elinor Mills
eBay noteworthy patents may be challenged in the courts.
Flickr __/ 02-06-2006 \__
Google Small is beautiful for
iTunes Web 2.0 start-ups
Lands' End Type of Model: Description:
Martin LaMonica
Listen.com
Brokerage Brokers are market-makers: they bring buyers and
LiveWire __/ 02-06-2006 \__
Model sellers together and facilitate transactions. Brokers play
Monster.com Networks' iTunes
a frequent role in business-to-business (B2B),
Netflix gamble paying off
business-to-consumer (B2C), or consumer-to-consumer
NY Times Digital The Hollywood Reporter
(C2C) markets. Usually a broker charges a fee or
Ofoto
commission for each transaction it enables. The formula
Orbitz
for fees can vary. Brokerage models include: __/ 01-31-2006 \__
Overture
Newspapers want search
PayPal
Marketplace Exchange -- offers a full range of services engines to pay
Priceline
covering the transaction process, from market Greg Sandoval
Red Hat
assessment to negotiation and fulfillment. Exchanges
Slashdot
operate independently or are backed by an industry
Truste
consortium. [Orbitz, ChemConnect]
Wikipedia
Yahoo! On the airwaves:
Buy/Sell Fulfillment -- takes customer orders to buy
or sell a product or service, including terms like price and __/ 02-02-2006 \__
delivery. [CarsDirect, Respond.com] Western Union Sends Its
Last Telegram
Hungry minds: Demand Collection System -- the patented Robert Siegel
"name-your-price" model pioneered by Priceline.com.
2004 Paid Online Prospective buyer makes a final (binding) bid for a __/ 02-01-2006 \__
Content U.S. Market specified good or service, and the broker arranges Teens Create their Own
Spending Report fulfillment. [Priceline.com] Space Online
Online Publishers
Lynn Neary
Association Auction Broker -- conducts auctions for sellers
(individuals or merchants). Broker charges the seller a __/ 01-12-2006 \__
The Long Tail listing fee and commission scaled with the value of the Tailor-Made Cartography
Chris Anderson transaction. Auctions vary widely in terms of the offering with Google Maps
and bidding rules. [eBay] Robert Siegel
iTunes: How Copyright,
Contract, and Transaction Broker -- provides a third-party payment __/ 01-06-2006 \__
Technology Shape mechanism for buyers and sellers to settle a transaction. 'The Google Story'
the Business of [PayPal, Escrow.com] David Gardner
Digital Media
William W. Fisher, et al. Distributor -- is a catalog operation that connects a __/ 01-04-2006 \__
large number of product manufacturers with volume and The Future of Television
Pricing and Architecture retail buyers. Broker facilitates business transactions Rick Karr
of the Internet between franchised distributors and their trading
Andrew Odlyzko partners.
__/ 01-03-2006 \__
Advertising Strategies
An e-Business Model Search Agent -- a software agent or "robot" used to Challenged in High-Tech
Ontology for Modeling search-out the price and availability for a good or service Age
e-Business specified by the buyer, or to locate hard to find Robert Smith
Alexander Osterwalder information.
Yves Pigneur
__/ 12-28-2005 \__
Virtual Marketplace -- or virtual mall, a hosting service Online Retail Sales Hike
Bid Together, Buy for online merchants that charges setup, monthly listing, Expected in 2005
Together: On the and/or transaction fees. May also provide automated Susan Stamberg
Efficacy of Group-Buying transaction and relationship marketing services. [zShops
Business Models and Merchant Services at Amazon.com]
Robert J. Kauffman __/ 11-17-2005 \__
Bin Wang Google Base Poses a
return to top Dilemma for Businesses
Scott Horsley
The Truth about Advertising The web advertising model is an extension of the
Internet Business Model traditional media broadcast model. The broadcaster, in
Models this case, a web site, provides content (usually, but not __/ 04-25-2005 \__
Jeffrey F. Rayport The Internet as a

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Business Models on the Web | Professor Michael Rappa http://digitalenterprise.org/models/models.html

necessarily, for free) and services (like email, IM, blogs) Public Utility
B2B E-Commerce Hubs mixed with advertising messages in the form of banner Neal Conan
Steven Kaplan ads. The banner ads may be the major or sole source of
Mohanbir Sawhney revenue for the broadcaster. The broadcaster may be a __/ 03-16-2005 \__
content creator or a distributor of content created Music's Future, Online
Business Models for elsewhere. The advertising model works best when the and Digital
Electronic Markets volume of viewer traffic is large or highly specialized. Neal Conan
Paul Timmers
Portal -- usually a search engine that may include __/ 03-09-2005 \__
A Taxonomy of varied content or services. A high volume of user traffic Movies, Technology and
Internet Commerce makes advertising profitable and permits further the Future of Viewing
Paul Bambury diversification of site services. A personalized portal Neal Conan
allows customization of the interface and content to the
user. A niche portal cultivates a well-defined user __/ 03-04-2005 \__
demographic. [Yahoo!] The Business of
Diamonds: An Interview
Previous topic:
Classifieds -- list items for sale or wanted for purchase. with Blue Nile CEO
Listing fees are common, but there also may be a Mark Vadon
membership fee. [Monster.com, Craigslist, David Gardner
Match.com]

User Registration -- content-based sites that are free

to access but require users to register and provide Data sources:
Web Analytics
demographic data. Registration allows inter-session
tracking of user surfing habits and thereby generates Usage Metrics
data of potential value in targeted advertising Nielsen // NetRatings
campaigns. [NYTimes Digital]
Top 500 Sites
Query-based Paid Placement -- sells favorable link Alexa Web Search
positioning (i.e., sponsored links) or advertising keyed to
particular search terms in a user query, such as Web Advertising Data
Overture's trademark "pay-for-performance" model. AdRelevance
[Google, Overture]

Contextual Advertising / Behavioral Marketing --

freeware developers who bundle adware with their
product. For example, a browser extension that Look it up:
automates authentication and form fill-ins, also delivers
advertising links or pop-ups as the user surfs the web. Blogosphere
Contextual advertisers can sell targeted advertising
based on an individual user's surfing activity. [Claria] Podcasting

Content-Targeted Advertising -- pioneered by Google, RSS

it extends the precision of search advertising to the rest
of the web. Google identifies the meaning of a web page Virtual community
and then automatically delivers relevant ads when a user
visits that page. [Google]

Intromercials -- animated full-screen ads placed at the Next topic:

entry of a site before a user reaches the intended
content. [CBS MarketWatch]

Ultramercials -- interactive online ads that require the

user to respond intermittently in order to wade through
the message before reaching the intended content.
[Salon in cooperation with Mercedes-Benz]
Digital Markets
return to top

Infomediary Data about consumers and their consumption habits are

Model valuable, especially when that information is carefully
analyzed and used to target marketing campaigns.
Independently collected data about producers and their
products are useful to consumers when considering a
purchase. Some firms function as infomediaries
(information intermediaries) assisting buyers and/or
sellers understand a given market.

Advertising Networks -- feed banner ads to a network

of member sites, thereby enabling advertisers to deploy
large marketing campaigns. Ad networks collect data
about web users that can be used to analyze marketing
effectiveness. [DoubleClick]

Audience Measurement Services -- online audience

market research agencies. [Nielsen//Netratings]

Incentive Marketing -- customer loyalty program that

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provides incentives to customers such as redeemable

points or coupons for making purchases from associated
retailers. Data collected about users is sold for targeted
advertising. [Coolsavings]

Metamediary -- facilitates transactions between buyer

and sellers by providing comprehensive information and
ancillary services, without being involved in the actual
exchange of goods or services between the parties.
[Edmunds]

return to top

Merchant Wholesalers and retailers of goods and services. Sales

Model may be made based on list prices or through auction.

Virtual Merchant --or e-tailer, is a retail merchant that

operates solely over the web. [Amazon.com]

Catalog Merchant -- mail-order business with a

web-based catalog. Combines mail, telephone and online
ordering. [Lands' End]

Click and Mortar -- traditional brick-and-mortar retail

establishment with web storefront. [Barnes & Noble]

Bit Vendor -- a merchant that deals strictly in digital

products and services and, in its purest form, conducts
both sales and distribution over the web. [Apple iTunes
Music Store]

return to top

Manufacturer The manufacturer or "direct model", it is predicated on

(Direct) Model the power of the web to allow a manufacturer (i.e., a
company that creates a product or service) to reach
buyers directly and thereby compress the distribution
channel. The manufacturer model can be based on
efficiency, improved customer service, and a better
understanding of customer preferences. [Dell
Computer]

Purchase -- the sale of a product in which the right of

ownership is transferred to the buyer.

Lease -- in exchange for a rental fee, the buyer receives

the right to use the product under a “terms of use”
agreement. The product is returned to the seller upon
expiration or default of the lease agreement. One type of
agreement may include a right of purchase upon
expiration of the lease.

License -- the sale of a product that involves only the

transfer of usage rights to the buyer, in accordance with
a “terms of use” agreement. Ownership rights remain
with the manufacturer (e.g., with software licensing).

Brand Integrated Content -- in contrast to the

sponsored-content approach (i.e., the advertising
model), brand-integrated content is created by the
manufacturer itself for the sole basis of product
placement. [bmwfilms].

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Affiliate In contrast to the generalized portal, which seeks to

Model drive a high volume of traffic to one site, the affiliate
model, provides purchase opportunities wherever people
may be surfing. It does this by offering financial
incentives (in the form of a percentage of revenue) to
affiliated partner sites. The affiliates provide
purchase-point click-through to the merchant. It is a
pay-for-performance model -- if an affiliate does not
generate sales, it represents no cost to the merchant.
The affiliate model is inherently well-suited to the web,
which explains its popularity. Variations include, banner
exchange, pay-per-click, and revenue sharing programs.
[Barnes & Noble, Amazon.com]

Banner Exchange -- trades banner placement among a

network of affiliated sites.

Pay-per-click -- site that pays affiliates for a user

click-through.

Revenue Sharing -- offers a percent-of-sale

commission based on a user click-through in which the
user subsequently purchases a product.

return to top

Community The viability of the community model is based on user

Model loyalty. Users have a high investment in both time and
emotion. Revenue can be based on the sale of ancillary
products and services or voluntary contributions; or
revenue may be tied to contextual advertising and
subscriptions for premium services. The Internet is
inherently suited to community business models and
today this is one of the more fertile areas of
development, as seen in rise of social networking.

Open Source -- software developed collaboratively by a

global community of programmers who share code
openly. Instead of licensing code for a fee, open source
relies on revenue generated from related services like
systems integration, product support, tutorials and user
documentation. [Red Hat]

Open Content -- openly accessible content developed

collaboratively by a global community of contributors
who work voluntarily. [Wikipedia]

Public Broadcasting -- user-supported model used by

not-for-profit radio and television broadcasting extended
to the web. A community of users support the site
through voluntary donations. [The Classical Station
(WCPE.org)]

Social Networking Services -- sites that provide

individuals with the ability to connect to other individuals
along a defined common interest (professional, hobby,
romance). Social networking services can provide
opportunities for contextual advertising and subscriptions
for premium services. [Flickr, Friendster, Orkut]

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Subscription Users are charged a periodic -- daily, monthly or annual

Model -- fee to subscribe to a service. It is not uncommon for
sites to combine free content with "premium" (i.e.,
subscriber- or member-only) content. Subscription fees
are incurred irrespective of actual usage rates.
Subscription and advertising models are frequently
combined.

Content Services -- provide text, audio, or video

content to users who subscribe for a fee to gain access to
the service. [Listen.com, Netflix]

Person-to-Person Networking Services -- are

conduits for the distribution of user-submitted
information, such as individuals searching for former
schoolmates. [Classmates]

Trust Services -- come in the form of membership

associations that abide by an explicit code of conduct,
and in which members pay a subscription fee. [Truste]

Internet Services Providers -- offer network

connectivity and related services on a monthly
subscription. [America Online]

return to top

Utility The utility or "on-demand" model is based on metering

Model usage, or a "pay as you go" approach. Unlike subscriber
services, metered services are based on actual usage
rates. Traditionally, metering has been used for essential
services (e.g., electricity water, long-distance telephone
services). Internet service providers (ISPs) in some parts
of the world operate as utilities, charging customers for
connection minutes, as opposed to the subscriber model
common in the U.S. [IBM]

Metered Usage -- measures and bills users based on

actual usage of a service.

Metered Subscriptions -- allows subscribers to

purchase access to content in metered portions (e.g.,
numbers of pages viewed). [Slashdot]

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About the author: Michael Rappa is the Alan T. Dickson Distinguished

University Professor of Technology Management at North Carolina State
University in Raleigh, North Carolina.

© 2006 Michael Rappa About | Notices | Schedule | Administrivia | Terms of Use | Contact

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