1. © 2003 UMFK. 1-1 Network Utility Provider internet business models text and cases Tony Gauvin

2. © 2003 UMFK. 1-2 Overview Definition, Categorization, and delineation Network Utility Economics Establishing Standards –Key factors GBF? Winner take All

3. © 2003 UMFK. 1-3 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. © 2003 UMFK. 1-4 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. © 2003 UMFK. 1-5 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. © 2003 UMFK. 1-6 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. © 2003 UMFK. 1-7 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. © 2003 UMFK. 1-8 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. © 2003 UMFK. 1-9 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. © 2003 UMFK. 1-10 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. © 2003 UMFK. 1-11 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. © 2003 UMFK. 1-12 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. © 2003 UMFK. 1-13 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