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Network Utility Provider

Network Utility Provider. internet. business models. text and cases. Tony Gauvin. Overview. Definition, Categorization, and delineation Network Utility Economics Establishing Standards Key factors GBF? Winner take All. Definition.

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Network Utility Provider

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  1. Network Utility Provider internet business models text and cases Tony Gauvin

  2. Overview • Definition, Categorization, and delineation • Network Utility Economics • Establishing Standards • Key factors • GBF? • Winner take All

  3. 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

  4. Categories • Media Players • Streamed media • Downloaded media • Communications enablers • E-wallets • Common Characteristic • Provider must mobilize a network of users • exploit a network effect

  5. 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

  6. 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

  7. 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

  8. 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%

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

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