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Crafting E-Business Models

A fundamental shift in the economics of information is underwaya shift

that is less about any specific new technology than about the fact that a new behavior
is reaching critical mass. Millions of people at home and at work are communicating
electronically using universal, open standards. This explosion in connectivity is the
latestand for business strategiststhe most important wave in the information
revolution. A new economics of information will precipitate changes in the structure
of entire industries and in the ways companies compete.1

Few would dispute that rapid technological advancements over the latter half of the 20th
century spawned dramatic worldwide socioeconomic changes. The 1990s dawned as a time of
retrenchment as large, established firms struggled to shed static, rigid structures, processes, and
business mind-sets that remained as legacy to the industrial era. By the mid-1990s, information
technology and business merged to establish a new era of industry and market dynamics. The
century drew to a close during a time of unparalleled business innovation led by bold entrepreneurs
with a vision for a global networked economy.

Today, as we stand at the gateway to a new millennium, the Internet and associated
technologies form the foundation upon which the global communication and information
infrastructure of business and society is being built. Initially, entrepreneurs and executives in
established firms approached Internet business building by exploiting the power of these new
network technologies in much the same way that fortune-seekers of the 1800s prospected for gold.
Although there are still frontiers to explore, the "gold rush" mentality is giving way to a search for
frameworks and analytics that can be used to define the e-business landscape.

Drawing on over six years of work with hundreds of Internet pioneers, this paper analyzes
how emerging e-business models are revolutionizing the way people work, play, learn, and
communicate. The issues highlighted in the paper are summarized on the following page and then
discussed in more detail in the remainder of the paper.

1Evans, P. and Wurster, T., Strategy and the Economics of Information, Boston: Harvard Business Review,
September-October, 1997.

Professor Lynda M. Applegate and E-Business Fellow Meredith Collura prepared this paper for use in Building E-
Businesses Online. Correct citation format is: Applegate, L.M. and Collura, M., Crafting E-Business Models, Building
E-Businesses Online, Boston: HBS Publishing (No. 800-391), 2000.
Copyright 2000 by the President and Fellows of Harvard College. To order copies or request permission to
reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to
http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying,
recording, or otherwisewithout the permission of Harvard Business School.

Crafting E-Business Models

Crafting E-Business Models

Key Issues:

1. When the Internet first burst on the scene in the mid-1990s, many believed that there would be
massive channel disintermediation. However, this has not been the case in most industries. Instead,
horizontal and vertical portals are emerging as a dominant source of power. There is, however, one
key exceptiontechnology producers such as Cisco and Dell are selling direct to customers. Why
have Cisco, Dell, and other technology companies been successful selling direct? Are the powerful
business-to-consumer (B-2-C) and business-to-business (B-2-B) portals of today merely a transition
phase of market evolution useful only until market participants learn to go direct?

2. The distinct separation between companies that produce and sell technologies (for example, IBM,
Intuit, and Microsoft) and the businesses that use technology as a core component of their strategy
and operations (for example, Charles Schwab and Ventro, formerly called Chemdex) is going away.
IBM, Microsoft, and Intuit no longer just sell technology products; these companies are now content
aggregators, portals, and media companies. At the same time, non-high-tech businesses are also
becoming technology companies. David Pottruck, Co-CEO of Charles Schwab, says: [Charles
Schwab] is a technology company that just happens to be in the brokerage businessIf we are going
to be successful, [technology] is going to have to be built into our DNA. Do you agree? If so, how do
business executives learn to build technology into the DNA of their businesses?

3. Dot-com businesses are starting to lookand acta lot like established brick and mortar
companies. Similarly, traditional businesses are starting to lookand acta lot like dot-coms. The
winners in the Internet economy appear to be those that enable a smooth, seamless transition
between the online and offline worlds. In early 2000, we watched Internet stocks plummet and heard
numerous announcements of the launch of B-2-B exchange platforms by established competitors,
such as Ford, GM, and DaimlerChrysler in the auto industry and GE Medical, Medtronic, J&J, Baxter,
and Abbott Labs in healthcare. Is the pure-play click and order model that launched the Internet
economy outdated? Will established firms regain the upper hand?

4. Vertical and horizontal integration is back in vogue. While many believed that 21st century
integration would be achieved virtually through partnerships supported by electronic linkages, a
number of large e-business conglomerates are being built through ownership. Consider AT&T and
AOL in the network/multi-media broadcasting areas, and Citigroup and American Express in
financial services. But, even as some build e-business conglomerates through ownership, others like
Yahoo!one of the few profitable pure-play dot-comsare attempting to achieve market
dominance through virtual integration. Which approach will win?
This paper discusses these issues as it provides a framework for understanding the emerging
business models that are transforming markets, industries, and the firms that do business within them.


If there is one lesson we can learn from the continuing evolution of work and
competition in the new economy, its thisChange the question and you change the
game. The old question was What business am I in? The new question is What
is my business model?2
Executives and entrepreneurs around the world are searching for ways to exploit the power
of the Internet and associated technologies of the network era. In doing so, they are creating new

2 Slywotzky, A. and Morrison, D., Profit Patterns. New York: N.Y. Times Business, 1999.

Crafting E-Business Models

business models that represent an interesting blend of old and new. David Pottruck, co-CEO of
Charles Schwab commented:
It is just an incredible time to be in business and have the rules of business
changing. For many years we operated under a pretty consistent set of rules. They
evolved maybebut now theyre morphing and that presents a situation that
challenges entrepreneurs to figure out: Are these rules real, or are they temporary?
Should we respond to them? Do we create new rules? How do we run a company in
a world like this when we have 13,000 employees trying to figure out where we are
going and what we should do?3
Why is a focus on business models so important today? If you think about it, we spent nearly
a century building and perfecting the Industrial Age models that defined how companies conducted
business throughout most of the 1900s. As a result, we knew what it meant if someone said, I sell
insurance or I sell cars. We had developed a shorthand way of describing how a business was
structured, what type of people were needed, and what roles they filled. That shorthand told us how
our company interacted with others in the industry and, most importantly, how it made money and
delivered value to customers, suppliers, partners, employees, and owners. It also told everyone who
did business with us what they could expect. The Industrial Age business model became so familiar
that they no longer required explanation.

In contrast, the Internet requires that we invent new models. It provides a new channel for
procuring and distributing products and services and for creating and packaging content in all of its
many forms, including data, voice, and video. This highly interactive and engaging channel offers
new capabilities that werent available in pre-Internet channels and communication platforms.
However, successful invention also requires new assumptionsthe mental models that define how
we view the world. This does not, however, require that we throw out our old models. In fact, the
best inventions leverage old paradigms, relaxing assumptions to define a new model that is both
familiar, yet decidedly superior to the old. Scott Cook, founder of Intuit, explained:
Some of the best innovations involve a paradigm shift, a real mental change
of assumptions and certainties. In fact, the process of innovating and
entrepreneuring is much less about invention or new ideas. Its much more about re-
thinking and questioning the assumptions people already make The ability to
rethink fundamental assumptions and take what people accept as certain and
question it, [is the central] talent of being a great entrepreneur. And usually these
entrepreneurs are focused on the customer.4
Successful e-businesses use the Internets interactive features to listen to the customer, and
then they use what they are learning to drive business design. But, good listening requires that
executives and employees at all levels be able to understand what the customer is trying to
accomplish. Does the customer want to complete a transactionfor example buying a bookin the
most efficient way possible? Do they want to browse, searching for something that attracts their
interest or meets a more targeted need? Or, do they want to interact with others, sharing experiences
and gaining new perspectives? Understanding the purpose behind the customers visit and
inventing new ways to help each customer achieve his or her purpose in the most efficient and
engaging way is key to e-business success. Jeff Bezos, CEO of Amazon.com, has built his firm upon a
relentless focus on the customer. He described the philosophy that shapes Amazon.coms business

3 David Pottruck address to HBS executive class October 1999.

4 Scott Cook address to HBS students and faculty September 1998.

Crafting E-Business Models

I believe that you can be more successful obsessing over the customer. Its
also the case that [on the Internet] the competitive framework changes so rapidly
that, if you base your strategy on what your competitors are doing, you have to
change it every day. If you base it on what customers are doing, [you will find that
their] needs evolve more slowly, so you can have a more stable strategy.

What does customer obsession really mean? Well, for us it means three
things: listen, invent, and personalize. The most traditional meaning of customer-
centric is to listen. Listen to customers, figure out what they want, and figure out
how to get it to them. [This is] easy to say and hard to do. The second thing is to
invent for customers. I think this is something that many companies, even good
companies, forget. [The paradox is that] if you dont listen to customers, youll fail.
But if you only listen to customers you will also fail, because its not the customers
job to invent for themselves. And this is a place where [Amazons] culture is very
supportive. [At Amazon, it is in our genes to pioneer], and it is painful for us not to
invent. The third thing is to personalize. This is the newest part of being customer-
centricand it really only applies to Internet companies. [At Amazon we put] each
individual customer at the center of [his or her] own universe. So if we have 17
million customers, we should have 17 million stores.

While customer experience drives business model design, these new business models both
shapeand are shaped bythe business community within which they operate. If you think about
it, introducing a new business model into an existing business community is like introducing a new
virus into an existing population. Just as our bodies fight the agent that is disrupting the status quo, a
business community resists new models. Survival of a new model depends on a process of adaptation
through which both model and community are changed. Sticking with the Amazon.com example, it
is helpful to examine what happened when it introduced its early click and order online bookstore
into the existing brick and mortar industry.
In July 1995, when Amazon.com opened the doors of its cyberbookstore, executives promised
that the companys new online business would revolutionize the book industry and the world of
retailing. Few would dispute that the company made good on its promises. But Amazons business
model in 1999 was much different from the one launched with its initial bookstore in 1995. At the
time of its launch, Amazon.com had minimal inventoryonly the hottest titlesand no physical
retail stores. Jeff Bezos, CEO and founder of the company, commented:

We launched the store out of a 400-square foot warehouse, which is about

the size of a one-car garage. We packed books kneeling on concrete floors Yet,
during the first 30 days, we shipped orders to all 50 states and 45 different countries.5

By launching the business as a click and order store, the company avoided the cost,
complexity, and risk of traditional brick and mortar competitors. Electronically linked to book
distributors, such as Ingram, worldwide shippers, such as Federal Express, and to customers through
its web site, the company served as a digital nerve centerdisplaying products, taking orders,
coordinating shipping, and selling books online. Initially, the only assets that Amazon.com owned
were the customer relationship, the consumer brand, and the vast store of personal information on
customer preferences, profiles, and purchasing behavior. These intangible assets were expected to

5 Comment made by Jeff Bezos as a keynote speaker at the annual Harvard Business School Cyberposium,
February 26, 2000.

Crafting E-Business Models

provide significant upside value and tremendous flexibility. (See Appendix A for a summary of
revenue, cost and asset options that can be used in building an e-business model.)

The click and order approach worked well when the number of people who purchased
online was small. But, the 1998 holiday season forced change to the e-retail model as Amazon.com
and other cyber pioneers were flooded with orders.6 Struggling to meet the tremendous spike in
demand, the companys impeccable reputation for excellence in customer service was threatened,
and this threat struck at the core assets of the business.

In January 1999, Amazon.com announced plans to build a network of distribution centers

throughout the country. By year-end 1999, the company had spent $300 - $400 million to lease and
outfit 5 new warehouse/distribution centersbringing the total number to 7 and increasing
warehouse capacity from 290,000 to 3.2 million square feet.7 In addition to improving order
fulfillment and supply chain management, Amazon also invested in customers sales and service and
announced the opening of their 7th physical customer service call center.8 Having built its revenue
model around rapid market penetration and customer retention through exceptional service to
customers, Amazon.com built its infrastructure to satisfy peak demand. In February 2000, Prudential
Securities analysts predicted that Amazon would have more than 65% distribution center
overcapacity.9 Company executives believed the over-capacity was central to the evolution of their
business model, and many analysts agreed. "This holiday season, Amazon.com made sure it did the
best thing it could do in building a long-term franchise and ensuring shareholder returnwe
delivered for our customers," said Joe Galli, Amazon.com president and COO.10 "In 2000, we expect
to do even more than in 1999, while at the same time driving operational excellence and platform
leverage. Galli went on to welcome the firms newest affiliate partners, NextCard, Ashford.com,
Greenlight.com, drugstore.com, Audible, and living.comdeals made in the fourth quarter of 1999 to
enable the company to monetize its investment in click and mortar infrastructure.

At the time that the company completed its initial public offering (IPO) in May 1997, less
than 5% of its sales were fulfilled through its warehouses, which actually represented a considerable
increase from its early days. However, by the end of 1999, 40% of its books were sourced directly
from publishers11 (as opposed to distributors) and stored in one of Amazons seven physical
warehouses. This percentage was expected to increase to 60% by the end of 2000. The need to take
control of physical inventory to meet uncertain demand caused book inventory turns to worsen from
50x annually when Amazon first went public in 1997, to 19x by late 1999.12 However, Amazons
inventory turnover rates remained considerably better than those of traditional brick and mortar
competitors; in 1998, Barnes and Nobles inventory turns were approximately 2x annually.

6 The Industry Standard reported that U.S. shoppers spent $5 - $7 billion online during the 1999 holiday
seasona 300% increase over 1998 holiday sales. Amazon.com attracted over 42% of all 1999 online holiday
sales. See Lawrence, S., Hard Numbers on eChristmas 1999, TheStandard (www.thestandard.com), February
24, 2000.
7 Rowen, M. and Hawkins, S.,Amazon.com, Inc. Prudential Securities, February 3, 2000; Ries, D. and Truong,
V., Amazon.com, C.E. Unterberg, Towbin, October 13, 1999.
8 Wolverton, T., Amazon Adds East Coast Customer Service Center, CNET (www.cnetnews.com), January 13,
9 Rowen, M. and Hawkins, S.,Amazon.com, Inc. Prudential Securities, February 3, 2000.
10 Statement by Joe Galli in Amazon company press release, February 2, 2000.
11 While there are 50,000 publishers in the U.S., the book publishing industry has become increasingly
consolidated, as the top 20 publishers account for 90% of North American book sales.
12 Becker, H., Amazon.com, Inc., Salomon Smith Barney, December 9, 1999.

Crafting E-Business Models

This pattern of business model evolutionfrom click and order to click and mortarand its
impact on revenue, cost, and asset models, is being repeated by e-businesses in many different
industries. It is an important pattern to remember as we begin examination of the emerging e-
business models that are defining the 21st century business landscape.


Consumers are looking for the ability to bundle the products they want in a
fashion unique to each individual, and the Web will provide this capability... We
believe that vertical portals will do the best job of providing the consumer
empowerment that the Internet makes possible... Not only will vertical portals have a
profound effect on traditional distribution networks, but because many vertical
portals will have production capabilities, they may also pose a threat to specialty
[producers] that choose to downplay the significance of the Internet channel.13

Over the past six years, Internet pioneers, such as Amazon.com, eBay, and Yahoo!, blazed new
trails and refined new business models. These new models can be grouped into two categories. First, and
most relevant for our discussion, are businesses built on the Internet, or companies that leverage the digital
infrastructure. Here, most of the action is taking place in the channel, creating powerful new models for
linking customers and the business community in new ways. These digital businesses include: business-to-
consumer models (Amazon.com and LandsEnd.com); consumer-to-consumer models (eBay); consumer-
to-business models (Priceline.com); and business-to-business models (FreeMarkets, Grainger.com, and
Ventro). The second category of models encompasses businesses that provide the digital infrastructure.
These businesses include producers who provide products and services directly to business customers
and consumers. Models in this category include: computer and network equipment providers (IBM,
Hewlett-Packard, Cisco, and Lucent); software firms (Microsoft and Oracle); and custom suppliers (Dell
on the equipment side, and Viant and Sapient on the software side). As you will see in this section, as the
Internet penetrates the core of how firms do business, the distinctions between these two categories
digital businesses and digital infrastructure providersis beginning to blur. But before we complicate
the picture further, we must first understand the individual models within each category. (See Appendix
B for a summary of emerging e-business models.)

Business models are defined along a continuum of creators, producers, distributors, and end-
users (see Exhibit 1). Creators develop new ideas, products or services, and refine existing ones.
These individuals may be inside a company, inside someone elses company or free-lancers (the latter
is a growing trend on the Internet). Producers then package the work of creators into products,
services, and solutions that meet a market need. They may sell and maintain the product or may
share that role with others in the value chain.14 Distributors enable buyers and sellers to connect,
communicate, and transact business. Users are individual consumers or businesses that are willing to
ultimately pay for a product, service, or solution. With respect to business consumer sales, typically
the users are inside the firm, often creating a two-stage adoption cyclefirst when the business
decides to purchase a product or service, and then when individuals decide to use the product or

13 U.S. Internet and Financial Services Equity Research Team, The Internet and Financial Services, Morgan
Stanley Dean Witter, August 1999.
14 As we will see later, industry participants that assumed these roles in traditional industries often interacted
with one another as part of a linear value chain, receiving inputs and value from those downstream in the chain
and delivering inputs and value to upstream members. Today, the simple linear relationships are giving way to
a complex web of relationships, which I call a value web.
Crafting E-Business Models

service. It is important to note that the process begins and ends with people, which is an important
feature for Internet commerce, considering the technologys ability to personalize experiences.15 In
the past, firms and individuals typically fulfilled one of the four rolescreator, producer, distributor,
and userreceiving inputs (materials, products, information etc.) from firms upstream in the value
chain, adding value, and then selling outputs to downstream firms or individuals. As you will see
in the next section of this paper, this linear industry model is becoming much less relevant on the
Internet, as value chains are transformed to more complex value webs.

Digital Business Models

Because the Internet initially functioned as a channel, many of the earliest Internet e-business
models related to distribution (or supply). These models include: focused distributorsfor example,
retailers, marketplaces, aggregators, exchanges and infomediariesand portalsfor example,
horizontal portals, vertical portals, and affinity portals.

Focused distributors

Focused distributors provide products and services related to a specific industry or market
niche. See Appendix C for case examples of the focused distributors. For example, InsWeb and
QuickenInsurance are focused distributors offering products and services within the insurance
industry and LandsEnd.com is a focused distributor for clothing and accessories. Until recently,
Amazon.com was classified as a focused book distributor. However, the companys recent expansion
into toys, games, consumer electronics, kitchenware, lawn and patio goods, as well as a wide range of
products sold through its zShops and auctions, has caused some to suggest that the Amazon.com
model is evolving toward a vertical portala model to be discussed in greater detail later in this

The five types of focused distributor business modelsretailers, marketplaces, aggregators,

exchanges, and infomediariesare differentiated from each other by the following characteristics.

Does the business assume control of inventory?

Does the business sell online?

Is the price set outside the market or is online price negotiation and bidding permitted?
Is there a physical product or service that must be distributed?
Retailers, such as Amazon.com and LandsEnd.com, assume control of inventory, set a non-
negotiable price to the consumer, and sell physical products online.16 Therefore, the primary revenue
model often is based on product/service sales, and the cost model includes procurement, inventory
management, order fulfillment, and customer service (including returns). Because e-retailers assume
control of physical goods, their ratio of tangible to intangible assets often is much higher than would
be found in a firm that does not assume control of physical inventory.

15 Even if the customer is a business, producers and distributors must often market and sell their productsnot
just to ensure adoption, but also to facilitate usage by individual employees within the business. This is
especially true for e-businesses.
16 See Collura, M. and Applegate, L. M., Amazon.com: Exploiting the Value of a Digital Business Infrastructure, HBS
Publishing (No. 800-330) for a more detailed analysis of the online retailer business model.
Crafting E-Business Models

Marketplaces, such as QuickenInsurance and E-Loan, sell products and servicesinsurance

and loans, respectively17but do not take control of physical inventory. They do, however, sell
products with a non-negotiable price and complete the sale online. Their revenue model includes a
commission or transaction fee on each sale. Because sales transactions take place online, e-
marketplaces must often electronically link to supplier databases and transaction systems to ensure
that transactions can be completed and revenue may be recognized. This is reflected in the cost
model; for example, it takes a team of IT professionals up to two months to integrate
QuickenInsurances transaction systems and databases with those of its carrier partners.18 However,
because marketplace companies do not assume control of physical inventory, procurement and
inventory management costs often are lower than those of retailers.

Aggregators, for example, InsWeb and Autoweb,19 provide information on products or

services for sale by others in the channeloften enabling comparison of features and pricingbut do
not complete the final transaction. Therefore, the revenue model for these sites is often based on
referral fees and advertising. Because the transaction is not completed online, some aggregators
especially aggregators of physical products and servicesfind that consumers use the site to
comparison shop but then go offline to make the purchase. As a result, aggregators often may not be
able to claim referral fees and must depend on advertising and other supplemental revenue sources.

Infomediaries, including Internet Securities20 and Individual.com, unite sellers and buyers of
information-based products, such as news, weather, sports, emerging market and financial
information. Because no physical product is involved, the transaction can be completed online.
Infomediariesespecially those that cater to business professionalsmay charge individual users a
subscription fee for the service. B-2-B infomediaries often charge a company a corporate subscription
fee that may provide either unlimited or limited usage. B-2-C infomediaries often provide the
information service free to consumers and make money based on advertising revenues collected from
sponsors or affiliates.

Because information is available elsewhere and the cost of packaging and delivering the
information is relatively low, barriers to entry are low. As a result, infomediaries must do more than
simply broker information. Some choose to develop unique, value-added content and analytical
tools; others choose to extend their business by incorporating new models. Within limits of privacy,
ethics, and regulation, infomediaries must also leverage the economic value of the information they
collect about how individuals use information to make decisions and make purchases. Over time,
these intangible information assets become a major source of strategic differentiation and

Exchanges, for example Priceline.com, eBay, and FreeMarkets, may or may not take control of
inventorythe tendency is to try and avoid assuming inventory carrying costs whenever feasible
and may or may not complete the final sales transaction online. The key differentiating feature of this

17 See Applegate, L.M., QuickenInsurance: The Race to Click and Close, HBS Publishing (No. 800-295) for a more
detailed analysis of the online marketplace business model.
18 The decision to provide system integration services, and to host the online insurance quoting, application, and
sales transaction systems for carriers, has enabled QuickenInsurance to add two digital infrastructure provider
modelsApplication Service Provider (ASP) and System Integrator and Developerwhich are discussed later
in this paper. These two models come with their own revenue modelsIT consulting and development fees,
and ongoing hosting and maintenance fees. They also come with their own cost and asset/cash models.
19 A portion of the AutoWeb site enables dealers and consumers to auction cars. As a result, AutoWeb has
adopted a hybrid business model that combines an aggregator and an exchange model.
20 See Applegate, L. M., Internet Securities: Building an Organization in Internet Time, HBS No. 398-007 for a more
detailed analysis of the infomediary business model.
Crafting E-Business Models

model is that the price is not set; it is negotiated by the buyer and seller at the time of the sale. The
revenue, cost, and asset models vary depending on whether the online exchange assumes control of
inventory and completes the transaction as well as the level of human facilitation required. B-2-B
auction exchanges, such as FreeMarkets, charge transaction fees and supplement revenues with fees
for consulting services. B-2-C and C-2-C exchanges often supplement transaction revenues with
advertising revenues.

Focused Distributor Trends. As we enter the 21st century, the following trends can be identified in
the focused distributor business model category:

By 1999, many focused distributors had greatly improved their flexibility to withstand attacks on
any one component of their model by creating hybrid businesses that combined several different
business modelseach of which generated separate revenue streams. For example, in addition
to generating transaction revenues from the sale of insurance, QuickenInsurance also generated
advertising revenues (from non-insurance carrier firms) and consulting and system integration
revenues (from insurance carriers that sold insurance through their site). Those focused
distributors who had not yet begun to extend their model were at risk for disintermediation.
Aggregators and infomediaries have become especially vulnerable.

Powerful B-2-B exchanges are evolving into horizontal and vertical portals that mimic the
structure and relationships found in the familiar consumer portal space. Forrester analysts
predict that by 2004, 53% of the over $2.7 trillion in Internet trade will flow through horizontal
and vertical B-2-B portals.21

E-retailers, for example, Amazon.com, have begun to monetizeor make money fromtheir
significant investments in click and mortar digital infrastructure by evolving into vertical retail
portals. As they do, e-retailers are reviving the department store/mall concept that continues to
dominate the physical retail channel.


The American Heritage Dictionary of the English Language defines the term portal as a doorway
or gateespecially one that is large and imposing.22 To many, this definition seems a fitting
description of the portal business model that has emerged on the Web. Although the terminology is
rather recent, the earliest online business portals (for example, American Hospital Supplys ASAP
and American Airlines Sabre) were first launched in the late 1960s and 1970s.23 Online consumer
portals (for example, America Online and CompuServe) emerged in the 1980s with the adoption of
the personal computer. Built upon proprietary technology, these pre-Internet portals provided
limited access. In fact, in late 1993, AOLs proprietary consumer portal had only 500,000 members.
By early 2000, the number had grown to over 21 million.24
Early Internet portals emerged to help consumers (and later business users) gain access to an
ever-increasing amount of content available on the Web. They served as gateways and provided the
tools needed to connect to the Internet (for example, AOL), to browse through its contents, locating
and presenting specific information pages (for example, Netscape), and to provide directory and
search services (for example, Yahoo!).

21 Kafka, S., eMarketplaces Boost B2B Trade, Forrester Research, February 2000.
22 American Heritage Dictionary of the English Language. Boston: Houghton Mifflin, 1971.
23 See Applegate, L.M., McFarlan, F.W. and McKenney, J.L., Electronic Commerce: Trends and Opportunities,
Corporate Information Systems Management, NY: McGraw-Hill Irwin, 1999.
24 AOL company web site (www.corp.aol.com/who_timeline.html), March 2, 2000.

Crafting E-Business Models

But the portal business model has expanded considerably. Today, large players are emerging
that not only serve as gateways, but also as destinations where people stop and conduct business.
Vertical portalssuch as Yahoo!Finance and AOLs Health Web Centerintegrate a variety of
focused distributor models within a deep vertical solution that provides what Morgan Stanley Dean
Witter analysts call the ultimate in consumer empowerment.25 In 1999, horizontal, vertical, and
affinity portals garnered 15% of all Internet traffic worldwide and 45% of all Internet advertising
revenues.26 They also established themselves as well-recognized and well respected Internet brands,
with 84% of Internet users naming AOL the top portal and 69% naming Yahoo!. See Appendix D for
case examples of portal business models described below. As the different players jockey for position,
it has become clear that the Internet portals of the 21st century will definitely be both large and
imposing, thus reflecting the name chosen for this business model.

The three types of business models in this categoryhorizontal portals, vertical portals, and
affinity portalsare differentiated in the following way:

Does the business provide gateway access to the full range of Internet information and services,
including search, calendar, e-mail, instant messaging, chat, and other community-building tools?

Does the business provide access to deep content, products, and services within a vertical
industry (e.g., financial services) or related industries (e.g., travel)?

Does the business provide information and services for all types of users or are the information
and services specific to a well-defined affiliation group (e.g., women, the elderly, lawyers,

Horizontal Portals, for example, AOL, Yahoo!, and Microsoft Network (MSN), provide
gateway access to the Internets vast store of content, and they also provide a broad range of tools for
locating information and web sites, communicating with others, and developing online communities
of interest. Like the broadcast networks upon which they were modeled, pure-play horizontal
portals, like Yahoo!, initially depended on advertising as the primary revenue source. Development,
maintenance, and operation of infrastructure and content were the primary costs. But, the pure-
play horizontal portal model proved hard to sustain. As a result, Yahoo! and others have extended
their models to include multiple vertical solution channels; for example, finance and health have
provided these companies with a new source of revenues from transaction fees. AOL as an example
also operates as an Internet Service Provider (ISP), generating almost 70% of its $4.8 billion 1999
revenues from subscription and access fees. It also generates revenues from advertising (21% of 1999
revenues) and, with its purchase of Netscape, from software licensing, sales, and
maintenance/integration fees (9.5% of 1999 revenues).

Vertical Portals, such as Quicken.com in the financial services area, WebMD, in the health
areas, and American Express Interactive Travel Service in the B-2-B travel industry27, provide deep
content, a place to conduct business, learn, play, or shop, and a set of communications and
community-building tools. Like other e-businesses, vertical portals often are composed of a variety
of business models. The models adopted by the vertical portal determine its revenue and cost
models. For example, if the vertical portal does not allow individuals to complete transactions, then
revenues primarily will be generated through advertising and referral fees. However, if transactions

25 U.S. Internet and Financial Services Equity Research Team, The Internet and Financial Services, Morgan
Stanley Dean Witter, August 1999.
26 Li, C., Parting of the Portal Seas, Forrester Research, December 1999.
27 See Applegate, L.M., Raube, C., and Barone, K., AXI TravelAmerican Express Interactive, HBS No. 399-014 for
a detailed analysis of the B-2-B vertical portal.
Crafting E-Business Models

are completed online, then sales revenues or transaction fees may be generated. Additionally, if the
portal includes unique content, then subscription revenues may be generated.

Affinity Portals provide deep content, commerce and community features, such as those
found in a vertical portal, but these offerings are targeted toward a specific market segment. Some,
like Women.com and Womens Financial Network (wfn.com), are targeted toward a specific gender.
Others, such as TheKnot.com, are targeted toward a specific event (weddings). Like other vertical
portals, the revenue, cost, and asset models are based on the business models adopted by the portal.

Portal Trends: The following trends define the evolution of the portal model:

As broadband-to-the-home becomes a reality, horizontal content portals are merging with

horizontal infrastructure portals to provide gateway accessnot just to content and
communication services, but also to network infrastructure and services. The actions of AT&T
and AOL during the late 1990s and early 2000s herald the emergence of vertically integrated,
multi-media telephone, voice, video, and entertainment broadcast networks. The long-term
viability of horizontal portals that fail to vertically integrate with digital infrastructure providers
is unclear. Some argue that Yahoo!s decision to forego ownership of the physical network
infrastructure has enabled the company to operate with lower fixed asset costs and increased
flexibility. Others argue that those players that own the infrastructure, like AOL and AT&T, will
be able to exert significant control over those firms that wish to use the infrastructure to
distribute content and services.

During the late 1990s, powerful global portals began to merge with global network providers.
For example, during 1999, AT&T and British Telecom formed a joint venture to provide global
communication services. As the levels of integration and reach increase, global, multi-media
conglomerates are being formed. Although traditionally based on physical wired networks,
wireless horizontal portals are emerging quickly outside the U.S.

As horizontal portals become the global gateways for accessing a wide range of network,
information, and communication services, vertical portals are widely believed to be in the ideal
position to become the destinations within which businesses and consumers will interact and
transact business. As a result, many analysts predict that independent focused distributors that
do not establish strong portal relationships are vulnerable to loss of power and eventual

Although the focus of our discussion is primarily on distributor models, it is helpful at this
point to comment on the evolution of producer business models. Producers design, produce, and
distribute products and services that meet customer needs. They include:

Manufacturers (for example, Ford Motor Company, General Electric, and Medtronic) that use the
Internet to design, produce, and distribute physical products and communicate with customers,
suppliers and partners;

Service providers (for example, American Express, Citigroup, and American Airlines) that offer a
wide range of online service offerings;

Educators (for example, Harvard Business School, Knowledge Universe, Centra, and Pensare)
that create and deliver online educational programs, products and services;

Crafting E-Business Models

Advisors (for example, Andersen Consulting, Ernst & Young, and Mainspring Communications)
that provide online research, consulting and advice;

Information and news services (for example, Internet Securities, The Wall Street Journal
Interactive and Individual.com) that create, package, and deliver online information; and

Custom suppliers (for example, McGraw-Hill and Boeing) that design, produce, and distribute
customized products (physical and information) and services.
During most of the 20th century, large, vertically integrated producers had the upper hand.
However, the Internet has changed that picture. In fact, given the strength of the channel players,
many question whether producers will be able to survive and prosper in the 21st century.28 Indeed,
by the latter half of the 1990s, many producers had done little more than put up web sites. But as we
enter the 21st century, some savvy producers are defining powerful new roles. For example:

American Express and Citigroup are in the process of linking their strong brand-name businesses
into vertical financial services portals that will go direct to business customers and consumers.
Over the past decade, these two financial powerhouses bought a broad range of financial services
firms (for example, brokerage and insurance). Although significant integration efforts remain,
the stage is set for these firms to offer one-stop-shopping for consumers and businesses financial
services needs, and these firms can either sell through portals or go direct to consumers.29 The
ability to build upon established digital infrastructures and relationships and the flexibility to sell
in multiple channels is critical to the success of these producer vertical portals.

Throughout the first half of the 20th century, Ford led the world into the era of mass
manufacturing, and now the automaker wants to repeat its trailblazing role in the 21st century.
Not only does Ford intend to embed wireless Internet services into its productsincluding
Internet access, e-mail, and global positioningbut it also has become an ISP for its 350,000
employees worldwide, offering each a home computer, printer, and Internet access for $5 per
month. In February 2000, Ford, in partnership with Cisco and Oracle, launched AutoXchange
an auction and procurement marketplace that would link Ford to its 30,000 suppliers.30 In March
of the same year, Ford joined forces with General Motors and DaimlerChrysler to create a
consolidated global automotive purchasing portal through which an estimated $240 billion in
annual purchases will be processed.31

Digital Infrastructure Providers

Until recently, there had been a distinct separation between businesses that were built using a
digital infrastructure and those businesses that primarily developed and sold the digital
infrastructurethe latter of which were often referred to as the high-tech industry.

For e-businesses of the 21st century, the digital infrastructure has become embedded within
the very fabric of how the firm creates, produces, and distributes products and services. As a result,

28 U.S. Internet and Financial Services Equity Research Team, The Internet and Financial Services, Morgan
Stanley Dean Witter, August 1999.
29 Possner, K. and Meehan, A., American Express Co.: Upbeat Investor Meeting, Morgan Stanley Dean Witter,
February 4, 2000; McVey, H., Citigroup: Key Themes Play Out, Morgan Stanley Dean Witter, January 25, 2000.
30 Dalton, G., Ford Thumps Chest on Auto Exchange, TheStandard (www.standard.com), February 9, 2000;
Kerwin, K. et. al., At Ford E-Commerce is Job 1, Business Week, February 28, 2000.
31 Dalton, G., The Suppliers Demands, (www.thestandard.com) March 6, 2000.

Crafting E-Business Models

it has become increasingly difficult to clearly categorize firms as pure play high-tech firms. David
Pottruck, co-CEO of Charles Schwab, emphasized this point:

[Charles Schwab] is a technology company that just happens to be in the

brokerage business. Everything we think about as we run our business has
technology in the center of it with the goal of engineering costs down and service
up . If you want to constantly increase service while decreasing the cost structure
and the cost of service, then technology is the play. You have to be great at it. If we
are going to be successful [against our competitors], technology will have to be built
into our DNA in a way thats different.32
In recognition of this new reality, any e-business model classification must include both the
models of businesses built on the Internet, as well as models of businesses that produce, distribute,
and maintain the technology infrastructure itself. Uniting these two types of models provides us with
a classification of emerging e-business models that can guide strategy formation and execution in the
information economy. (See Exhibit 2.)

Digital infrastructure provider business models are classified using the same
producer/distributor categories that define digital businesses built on the Internet. Once again,
powerful channel playershorizontal infrastructure portals (for example, MediaOne, AT&T, and US
Web/CKS) and vertical infrastructure portals (for example, Oracles Business Line, Sales.com, and
Peoplesoft.com)are emerging. Focused distributors include high-tech marketplaces (for example,
Tech Data and Ingram Micro) that take control of hardware and software inventory and complete the
sales transaction with the customer, and high-tech exchanges (for example, NECX). But unlike their
slower-to-respond digital business counterparts, high-tech producersincluding digital equipment
and software manufacturers (for example, Cisco, Microsoft, Intel, and IBM) and custom suppliers (for
example, Dell)were early adopters of direct-to-customer online business models. In fact, in 1999,
Cisco led the world in online retail sales with 84% of its orders placed online. However, due to space
constraints in this paper, I will limit discussion of digital infrastructure provider business models to a
description of emerging infrastructure portals.

Infrastructure Portals

Infrastructure portals provide consumers and/or businesses with access to a wide range of
network, computing, and application hosting services. Prior to the commercialization of the Internet,
many large firms developed and ran their own networks and data centersoften leasing telephone
services and data lines from network service providerscalled common carriers or Value-Added
Network Services (VANs) providers. Small- to mid-size businesses often bought low-end computers
and packaged software from local retailers, national distributors, or a network of value-added
resellers (VARs). However, in the network era of the 21st century, a new option has emerged; an
increasing number of small to mid-size firmsand even large firmsare choosing to plug in to a
sophisticated global data network and business software application infrastructure. Under this
model, firms may rent their digital infrastructure, which is hosted by an infrastructure portal
player, rather than leasing or buying it.

Infrastructure portalslike their digital business portal counterpartsare either horizontal

or vertical. They are differentiated by the following characteristics.

32 Presentation by David Pottruck in a Harvard Business School executive program, October 22, 1999.

Crafting E-Business Models

Does the firm provide gateway access to a complete set of network, data center, and/or web
hosting services?

Does the firm provide access to hosted vertical application services?

Horizontal Infrastructure Portals include Internet Service Providersalso called ISPs (for
example, AOL and Roadrunner Cable Services), Network Service Providers (for example, AT&T,
Sprint, MediaOne, and TimeWarner) and Web Hosting Service Providers (for example US
Web/CKS). Horizontal infrastructure portals provide gateway access to a wide range of network
(cable, voice, and Internet), data center, and hosting services. The revenue models include access and
maintenance fees, subscription services, and in some cases, transaction fees. If combined with an
online content business (e.g., AOL), the portal may also generate advertising revenues. The key costs
include data and network center operations, software development and maintenance, marketing,
sales, and administration.

Vertical Infrastructure Portals may also be referred to as Application Service Providers

(ASPs). An ASP hosts and maintains software applications online (rather than selling software
applications), enabling businesses and individuals to log in and conduct business online. Examples
of ASP vertical portals include Oracle's Business Online suite of integrated enterprise applications
and Sales.com. Because ASPs often operate as a business portal, rather than a consumer portal,
advertising is a less significant source of revenue. Instead, ASPs may generate revenues through
hosting and maintenance fees, consulting fees, and system integration fees. Key costs are similar to
those incurred by horizontal portals.

Digital Infrastructure Business Model Trends: The following trends define the evolution of digital
infrastructure business models.

The clear lines that historically distinguished digital infrastructure providers from the digital
businesses built on top of the digital infrastructure are beginning to blur. For example, horizontal
content portals, such as AOL and MSN, are also infrastructure portals as ISPs. As they do,
vertical portals, such as Ventro in the B-2-B space, are extending their models to become both an
infrastructure ASP and one or more vertical business portals built on that infrastructure. This
extension of the model was formally recognized by Ventro founder and CEO, Dave Perry, when
he announced the formation of Ventro (www.ventro.com), which replaced Chemdex
(www.chemdex.com), as the legal corporate entity.33 We want to take the platform we have
built for Chemdex into other vertical markets, Perry explained.34 Months earlier, when
addressing an MBA class at HBS, Perry was asked: What is your business model? He
responded: Were both a B-2-B e-commerce firm and an ASP.35 On the B-2-B side, we get
transaction revenues from suppliers and we charge the buyers a monthly service fee. Ten years
from now ERP software36 [and similar types of systems] wont be sold as software
packagesthey will be accessed via the Internet from someone who [specializes] in running
them. Building on this digital business infrastructure, in April 2000 Ventro announced the
launch of its 5th vertical B-2-B portal. As mentioned earlier, recent efforts by AOL to merge with

33 Ventro Corporation Stock Symbol (NASDAQ:VNTR) Replaces Chemdex Stock Symbol (NASDAQ: CMDX),
Ventro company press r elease, February 29, 2000.
34 Malik, O., Chemdex Changes Name, Game, Forbes.com (www.forbes.com), February 22, 2000.
35 Dave Perry commented to an HBS MBA class September 20, 1999. The remaining portion of the quote is from
a video interview conducted with Perry in August 1999.
36 Enterprise Resource Planning (ERP) refers to, a software system that aims to serve as a backbone for
integrating, coordinating, and managing a companys operations.
Crafting E-Business Models

Time Warner and extend its business model have set the stage for the development of a global,
multi-media horizontal B-2-C portal, combining Time Warners cable infrastructure and multi-
media content with AOLs horizontal portal. AOLs purchase of Netscape several years earlier
provided the platform required to extend its model into the B-2-B space.
As we entered the 21st century, there were two competing ASP models: producer-ASPs (e.g.,
Oracle, Siebel, SAP, and PeopleSoft), which provide online access to these firms brand name
software, and distributor-ASPs (e.g., US Internetworking), which offer a full suite of Internet
hosting services across a broad range of software brands. The latter, distributor-ASPs, claim that
customers want the flexibility to choose among many different best-in-class brand solutions.
The former, producer-ASPs, claim that customers want an integrated solution and a single brand
that they trust.
As suggested above, while established firms in non-high-tech industries approached the Internet
cautiously, high-tech hardware and software producers, like Cisco and Dell, aggressively
embraced the new online direct-to-customer channels and now have an impressive lead. Because
high-tech producers are now selling direct to customers, focused distributors in the high-tech
industry are struggling to find a sustainable position. Consider Cisco Systems, poster child for
the network economy; by late 1999, over 80% of its sales were made direct-to-customers online
and in early 2000, Cisco achieved the distinction of being the most valuable company in the
world with a market value of $541.6 billion on March 27, 2000.37


E-businesses are built by artfully combining a variety of business models. These businesses
are then linked with others in a business community to create what Frank Getman, CEO and
President of HoustonStreet Exchange, refers to as a web for the Web.38 By incorporating multiple
business models that generate separate revenue streams leveraging the same infrastructure, a firm
can more efficiently utilize resources and create additional value; this is particularly necessary for
success, given the slim margins that accompany much Internet e-commerce. Similarly, a firm can
protect itself from the uncertainty associated with rapidly changing technology and unstable business
and regulatory environments by using multiple revenue models. By then linking this web of
business models inside the firm with its business community composed of a much larger web of
business models, a company can leverage the resources of the community to further enhance value
delivered to all members.39

Because it provides a common infrastructure for sharing information and coordinating

business transactions, the Internet dramatically increases ones ability to create value webs. In fact,
the business communities formed on the Internet take on many of the features of spider webs built by
master craftsperson spiders.40 Although they may appear delicate on the surface, they are
surprisingly strong, sticky, flexible, and resilient.

37 Wong, W., Cisco Ascends to Most Valuable Company, (www.cnet.com) March 27, 2000.
38 HoustonStreet Exchange Weaves New Round of Investments and Strategic Partnerships into its web for the
Web, HoustonStreet Exchange company press release, March 23, 2000.
39 See Applegate, L., Defining a Unique Value Proposition, Building E-Businesses Online, Boston: HBS
Publishing, 2000.
40 For an interesting discussion of this concept, see: Hagel, J., and Singer, M., Net Worth. Boston: Harvard
Business School Press, 1999.
Crafting E-Business Models

If creating a value web sounds like a complicated task, its because it is. But, as we have seen
throughout this module, e-business designs build upon what we already know and extend our
knowledge and capabilities, as well as the opportunities that can be pursued. Thus, to begin to
understand e-business value webs, it is helpful to start first with more familiar models or the
traditional value chain.

From Value Chains To Value Webs

Traditionally, an industry has been viewed as a series of transactions and relationships
among a set of related firms. (An example of a transaction is the exchange of a product or service for
a payment.) In its simplest form, only two basic roles are required in a business transactionbuyer
and seller. Unfortunately, business is rarely that simple and, even before the Internet, most firms
operated within a network of producers and distributors involved in multiple transactions and
relationships. Traditionally, we have organized firms that perform these activities as a value chain.
As discussed earlier, each member of the value chain receives inputs from those upstream in the
industry, performs a series of activities that add value, and then delivers the results to the next
member downstream.41

However, that orderly, sequential structure has changed in todays Internet commerce. By
leveraging the common standards, connectivity, and capabilities of the Internet, todays e-businesses
transact business and manage a much broaderyet deeperset of relationships. They share more
detailed information as they conduct business and interact in real-time. To illustrate how a firm
builds its more complex value web, we will consider the example of Quicken.com, beginning with an
analysis of how it spins a value web inside the firm. However, before examining how
Quicken.com developed its value web, it is helpful to clarify the four mechanisms that successful e-
businesses use to adapt and evolve their business models in real-time. (See Exhibit 3.) They include:
1. existing business model offerings can be enhanced by adding new features or improving
existing ones;

2. the model can be expanded by adding new offerings or entering new markets with the
same offerings;

3. the business model can be extended by adding new business models or new businesses; or

4. a decision may be made to exit from a business.

Crafting an E-Business Value Web

Since its launch in 1995 by its parent, Intuit, Quicken.com has become a leading Internet
brand in the aggressively competitive online financial services industry. Initially, the business
operated as an information aggregator or an infomediary. Quicken.com accessed financial services
news and information from a number of different information providers, and added value by
synthesizing the content, categorizing it for easy search and retrieval, packaging it, and then
distributing it over the Internet to financial services information consumers. In an effort to expand its
customer base, Quicken.com executives decided not to charge consumers a subscription fee for its
service, but instead, generated revenues through advertising. The more consumers visited
Quicken.com, the more valuable the site became to advertisers.

41 Applegate, L.M., Electronic Commerce: Trends and Opportunities, Corporate Information Systems
Management: The Challenge of Managing in the Information Age. New York.: McGraw Hill-Irwin, 1999.
Crafting E-Business Models

Because the company was launched early in the history of the Internet and was able to
leverage Intuits widely known and well respected Quicken software brand, the fledgling dot-com
was able to quickly establish a solid presence. But, executives knew the advantage would not last,
and by 1996, the company had begun to evolve its model. In mid-1996, Intuit acquired
QuickenInsurance. Initially QuickenInsurance also operated as an information aggregator, enabling
consumers to enter information, compare quotes for insurance policies, and fill out an application for
these life insurance policies. The completed applications were then sent to an insurance carrier who
in turn sent them to traditional agents who closed the sale. However, between 1996 and 1998,
QuickenInsurance enhanced this service; for example, the web site enabled side-by-side comparison of
different insurance products across key policy features, deepened the educational content available,
added insurance calculators that individuals could use to quantify their insurance needs, and
improved site performance and ease of use. Furthermore, in 1998 QuickenInsurance expanded its
product line, adding auto insurance. Throughout this phase, however, the company remained an
aggregator; it was not until late 1998 that the company actually began to sell insurance policies
online. With this move, QuickenInsurance extended its business model to a marketplace. As an
aggregator, revenues were generated through advertising sponsorships and referral fees (or also
commonly called click-throughs). As a marketplace, revenues were generated through transaction
fees on completed insurance policy sales.

As QuickenInsurance evolved its business model, so too did Quicken.com. Between 1996
and 1999, it developed and launched three additional financial services aggregators: QuickenLoan,
QuickenRetirement, and QuickenInvestment. These three new e-businesses were developed
internally. One of these businesses, QuickenLoan, soon extended its business model to a
marketplace/producer, underwriting its own loans and earning transaction fees similar to those
earned by E-Loan (discussed in Appendix C). In addition, Quicken.com launched an online version
of Intuits popular packaged software productsfor example, consumer products, such as Quicken
and TurboTax, and small business products, such as QuickBooks. This enabled Quicken.com to
extend its model to become an ASP for Intuits large and loyal base of packaged software users. As
online traffic increased, and technology evolved such that transactions could be completed online,
Quicken.com launched a retail shopping siteselling its own software products, and also selling a
broad range of other consumer products, including automobiles, books, CDs, videos, computer
equipment, and travel.

Over the years, Quicken.com added new financial services offerings, many of which enabled
customers to transact business online, and thus evolved its business model from a simple content
aggregator to a vertical portal. Individual businesses within the portal represented a variety of
business models, including aggregators, marketplaces, and retailers. Some of the businesses
generated revenues and some did not. QuickenInsurance, QuickenBanking, QuickenTurboTax, and
QuickenBusiness also hosted software applications for use by customers and/or suppliers. These
Quicken.com businesses also operated as digital infrastructure vertical portals (ASPs) and generated
revenues from hosting fees, software licensing and maintenance, and systems integration fees.
With each new business model, the company leveraged the Quicken.com digital business
infrastructure and increased the revenue-generating capability of the business. In 1999, Quicken.com
generated transaction and/or sales revenues from the majority of its portfolio of businesses and, as a
vertical portal, generated additional advertising and referral fees. During fiscal year 2000, Intuit
expected to generate at least $200 million from the combined revenues of its Quicken.com vertical
portal. With each business model added, Quicken.com also increased the strategic options open to
the company for future expansion of the business model, while simultaneously protecting it from
competitive threats to any one portion of the business.

Crafting E-Business Models

Crafting an E-Business Community Value Web

Before leaving this discussion of value webs, it is important to analyze how Quicken.com
links its internal value web to other business webs. The relationship between AOL and Quicken.com
helps illustrate this point; recall from our discussion of horizontal portals that, in addition to
collecting revenues as a horizontal portal and ISP, AOL also operated 19 vertical portals, called Web
Centers. In early 2000, each vertical portal was run by one or more affiliates that paid AOL to draw
traffic to their sites. Quicken.com and each of its individual financial services businesses (such as
QuickenInsurance and QuickenLoans) were affiliates for AOLs financial services Web Center. Each
time a visitor conducted business on the AOL/Quicken.com site, AOL received a referral or
transaction fee from Quicken.com. For example, in 1999, 20% of QuickenInsurance traffic volume
came through AOL, 30% from Quicken.com, and 17% from one of its other online distribution

In addition to linking its value web with AOLs, Quicken.com and each of its separate
businesses also were linked to a wide range of other supplier, customer, and business partner webs.
For example, QuickenInsurances Internet-based digital business systems were linked directly to the
business systems of 55 insurance carrier partners and, in addition to the exclusive partnership with
AOL, Quicken.com and all of its associated businesses were also the exclusive financial services
providers for Excite, Prodigy, CBS Marketwatch, CNNfn, Webcrawler, Motley Fool, The Wedding
Channel, AutoTrader, and AutoWeb, among others.43 Exhibit 4 compares features of the
Quicken.com business community value web with that of Yahoo! Finance. It is important to note that
Yahoo! Finance has adopted a much different approach to building its vertical portal. While
Quicken.coms finance properties are integrated through ownership, Yahoo! has developed its portal
by virtually linking with a set of independent focused distributors, such as E-Loan and InsWeb. The
Yahoo!, E-Loan and InsWeb business models are discussed in more depth in Appendices C and D.

Keeping track of the constantly evolving relationships within a complex value web like
Quicken.com and understanding how to leverage the value of the multiple business communities to
evolve and grow in Internet time is a fundamental challenge.

Something Old And Something New

Experienced executives spent previous decades downsizing, delayering, focusing, and

simplifying their businesses. But the e-businesses described here are anything but simple, focused,
and small. In fact, vertical and virtual integration through ownership and a broad range of strategic
partnershipsas well as some of which may be exclusive and some of which may involve shared
equityseem to be back in vogue. This leads many to speculate that e-business designs are
beginning to look a lot like the mega-conglomerates of the industrial era.

Although it may appear that e-businesses look like conglomerates on the surface, one
important difference is revolutionizing how e-business is conducted around the world. The large,
vertically integrated businesses built during the first half of the 20th century managed complexity by
minimizing it. Standardized products were sold to mass markets. Inside the firm, standardized,
highly specialized jobs were staffed by assembly workers, each passing a unit of production over the

42 Applegate, L., QuickenInsurance: The Race to Click and Close, HBS No. 800-295.
43 A study by Media Metrix in May 1999 listed the top 7 financial services vertical portals in terms of reach as:
AOL (12.7%); Yahoo! Finance (5.4%); Quicken.com (3.2%); E*Trade (2.9%), MSN Money (2.7%) and First USA
Crafting E-Business Models

wall to the next highly specialized worker up the line. The assembly line model was replicated
within industries, as each company bought supplies from companies in the value chain, added
value, and then sold the value-added products to a distributor or customer downstream.

Todays 21st century e-businesses use sophisticated information and communication

technologies to exploit complexity as a competitive advantage. Each product or service offering is
highly customized and personalized to each individual business customer or consumer. Teams of
expertsinside and outside the firmwork together to produce creative and innovative solutions
that may appear simple on the outside, yet, in reality, are often highly sophisticated. Digital business
infrastructures streamline operations, enabling complex tasks to be performed like clockwork. As
they do, performance information is collected and analyzed to provide the real-time feedback
required of a self-learning, self-correcting, highly adaptive, and innovative system. These complex e-
business value webs are built on sophisticated digital nervous systems that enable them to appear
simple while directly managing a complex web of products, services, customers, suppliers, and
partners.44 Key insights from this study of emerging e-business models are presented below.
While customer experience drives business model designs, business models shapeand are
shaped bythe business community within which they operate. Anyone who has ever talked to
a customer or a focus group knows that they rarely tell you exactly what they want. Instead,
breakaway business innovations demand that executives listen closely and then invent. But, thats
just the beginning. Once the new invention is introduced, success is determined by the ability to
continue to listen closely and then adapt quicklynot just to the customer, but also to every
member of the business community. As we study the evolution of e-business models of early
Internet pioneers, such as Amazon.com and Charles Schwab, we clearly see this cycle of listening,
inventing, and adapting to the experiences and expectations of customers and the business
community. And, in most instances, e-businesses that have pulled ahead of the pack have been
those that successfully integrated the best of traditional and new age business models, enabling
customers and the business community to move seamlessly between the online and offline

Key Insights:

The best designs integrate familiar ways of doing things with value-added enhancements;
however, customers and members of your business community may not be able to tell you
the familiar experiences they want to keep and the new value-added enhancements they are
willing to pay for.

Attention must be paid to both transactional efficiency and a personalized, engaging

customer experience.

The best experiences enable a smooth transition between the online and offline worlds for
customers and all members of the business community.

As e-businesses adapt to the needs of the customer and the requirements of the business
community, early click and order e-business models are evolving into click and mortar

44 Applegate, L., In Search of a New Organizational Model: Lessons from the Field, Shaping Organizational
Form: Communication, Connection, and Connectivity, (eds. DeSanctis, G. and Fulke, J.), Berkely: Sage
Publishing, 1999; and Applegate, L., Time for the Big-Small Company, Financial Times Mastering Information
Management, March 1, 1999.
Crafting E-Business Models

Survival and success demands that executives learn to evolve their businesses in Internet

Business model evolution is a continual process of learning and adaptation that must be
integrated within a firms daily operationsnot left to chance.

Through evolution and adaptation, new e-business models emerge. Initially, business strategists
believed that the impact of the Internet and associated technologies would be disintermediation.
Instead, in many industries, power is shifting to the channel. As we enter the 21st century,
powerful new business-to-consumer (B-2-C) and business-to-business (B-2-B) portals are
controlling access to online channels. But, the game may not be over yet. In many industries,
established suppliers and manufacturers have begun to respondcreating their own portal or
partnering with others in their industry to form industry keiretsus.45 In the high-tech industry,
hardware and software firms like Cisco, IBM, Dell, Oracle, and Microsoft are either bypassing the
channel and going direct, or they are forming their own digital infrastructure portals; these
infrastructure portals may be horizontal, providing gateway access (for example, ISPs), or they
may be vertical destinations (for example, ASPs). It is still unclear which models will dominate
during the 21st century.

Key Insights:

Horizontal and vertical portals are emerging as dominant sources of power.

Focused distributors that do not allow customers and the business community to transact
business online are losing power.

To capture customer and channel attention, producers must be best-in-classthe #1 or #2

most well-respected brand.

Infrastructure producershardware and software providersstaked their Internet claim

early and have established powerful positions, selling direct to customers.

The distinct separation between digital infrastructure providers and the digital businesses
that are being launched on the infrastructure is beginning to blur; horizontal and vertical
business portals are merging with horizontal and vertical infrastructure portals.

Vertically integrated producers are launching producer portals.

Coalitions of suppliers are forming B-2-B portals.

45 The term, keiretsu, was originally used to describe societies of business popular in Japan. Supply keiretsus
were a collection of companies within a supply chain that were clustered around a dominant manufacturer;
banking keiretsus were a collection of companies clustered around a bank that helped allocate investment
resources within the group. During the late 1990s and into the 21st century, an Internet version of the keiretsu
began to attract attention in the press. An example of an Internet supplier keiretsu is the healthcare exchange
announced by Medtronic, GE Medical Systems, Baxter, J&J, and Abbott Labs. Another example is the network of
firms linked with Internet investment giants, Softbank and Kleiner Perkins Caufield & Byers. It is important to
note that there are differences in the traditional Japanese and Internet models of keiretsus that bear exploring.
Putnam, L. and Chan, P., The American Keiretsu: Americas New Competitive Advantage, American Business
Review, January 1998.
Crafting E-Business Models

Value webs have replaced value chains. Many of the most powerful e-businesses are anything but
simple and focused. Consider AOL, which over the past few years has extended its initial
network services provider, content aggregator, and community facilitator business models to
become a media conglomerate, online shopping mall, and, assuming the Time-Warner merger
goes through, a cable operator, magazine, and book publisher. In fact, the most successful e-
businesses have been built by artfully combining a variety of old and new business models. As
models are added, flexibility increases and the ability to respond to unforeseen events and
conditions improves. The value webs within the firm are then linked to the value webor
websthat make up the companys business community.46 These complex webs of
interconnections and relationships enable firms to work together to increase value for all
members of the community. Like the spider webs upon which they are modeled, value webs
create a robust, flexible and sticky business community that unites members in a dynamic and
complex set of transactions and interactions through which value is created and exchanged.

Key Insights:

E-businesses are built by combining old and new models that provide multiple revenue streams.

E-businesses evolve through four mechanisms: enhancing, expanding, extending and exiting.

The orderly, sequential transactions and relationships among participants in an industry value
chain are being replaced by a more complex web of transactions and relationships among
members of a business community. These communities are not limited by previously defined
industry boundaries and rigid distinctions between home and work.

Successful e-businesses are able to create and nurture strong, sticky, flexible and resilient value
webs that work together to benefit every member of the community.

Vertical integration through ownership and virtual integration through partnerships is back in
vogue. But, unlike the vertically integrated conglomerates of the first half of the 20th century that
managed complexity by minimizing it, e-business conglomerates of the 21st century use
sophisticated digital business designs to embrace complexity and manage it directly.


Social theorist Thomas Kuhn's analysis of scientific revolutions suggests that crisis is a
necessary pre-condition for the emergence of a new model.47 This crisis often is stimulated by the
appearance of a new invention that creates new opportunities. But, when presented with a new
invention, most people do not immediately reject the existing model. Instead, they attempt to relate
the new invention to existing theories and assumptions, to provide incremental improvements, but
also maintaining the stability of the current mode of operation. At some point, a creative and bold
entrepreneuroften an outsider or fringe member of a community with little investment in the
current systemis the first to break the shackles of old ways of thinking. Often the successful
entrepreneur is not the first to come up with the new idea, but instead is the first to find a viable
business model with which to commercialize it. But, even once the new model or invention is
introduced, adaptation and evolution occur.

46 The concept of a value web is discussed in depth in: Hagel, J. and Singer, M., Net Worth. Boston: HBS Press,
47 Kuhn, T.S., The Structure of Scientific Revolutions. Chicago: University of Chicago Press, 1970.

Crafting E-Business Models

Clearly, the need for openness and flexibility, and the ability to continuously adapt and
change both perspectives and the businesses that embody them, are central to building a successful e-
business. As new e-business models are introduced into existing industries, unworkable or obsolete
models are rejected and viable models evolve. The viable models often contain elements of the old
and new, providing significant benefits to most, but not necessarily all, members of the community.
Over time, the models fuse, and new relationships and power structures are formed. Those who are
unable or unwilling to adapt perish.48
As we enter the 21st century, we are in the process of establishing a new economic world
order. The technological revolution of the latter half of the 1900s produced many new inventions that
forced firms to challenge existing assumptions and make incremental adjustments to business
models. The introduction of the Internet catalyzed the transition from evolutionary to revolutionary
change. Led by bold entrepreneurs with a vision for a new way of doing business, the early Internet-
based e-business models of the mid-1990s challenged existing assumptions. When these new models
were introduced into existing industries and markets, they were often ignored initially. But, as
customers began to respond favorably, established firms woke up and fought back. Unworkable
models or those unable to adapt were rejected. But some models delivered such significant benefits
to customers that they were able to withstand the attacks. Nevertheless, as the battles intensified, new
models evolved that merged the old and new, and industry and market relationships evolved to
incorporate the new inventions.

We are not close to the end of this transformation. In fact, many believe that the old business
maxim that defined transformational changeUnfreeze, Change, Refreezeis no longer relevant
and that an accelerated pace of evolution will become the norm. In the 1990s, the maxim was
Unfreeze, Change, Semi-Hardenreflecting comments from senior executives who felt that they
were managing their businesses in an environment made of slush. However, in the Internet era,
even the ability to semi-harden may be optimistic at the current rate of change.

48 VanParijs, P., Evolutionary Explanations in the Social Sciences: An Emerging Paradigm, Totowa, N.J.: Rowman and
Littlefield, 1981; Gersick, C., Revolutionary Change Theories: A Multilevel Exploration of Punctuated
Equilibrium, Academy of Management Review, 16:10-36, 1991.
Crafting E-Business Models

Exhibit 1: Businesses Built on the Internet or Digital Businesses

Creators Producers Distributors Users

Medtronic.com Focused Distributors

Entertainers Manufacturers Amazon.com

American American Consumers
Airlines Express
Authors & Providers Exchange
Boeing McGraw-
Custom Marketplace
Experts Suppliers
eCollege Aggregator/
Educators Infomediary
Ernst & Mainspring Portals

Yahoo! Business

Wall Street Financial Gateway

Journal Times
Information & DrKoop.com
News Services Destination

TheKnot.com Women.com

Crafting E-Business Models

Exhibit 2: Emerging E-Business Models

Crafting E-Business Models

Exhibit 3: Evolving an E-Business Strategy

Enhancement Extension
Add functionality or improve a Adopt new business
product or service that is models or enter new
currently offered businesses

Exit Expansion
Drop a product or Add products and
service line or exit a services within an
business existing business

Crafting E-Business Models

Exhibit 4: Crafting a Value Web

Crafting E-Business Models

Appendix A:
E-Business Asset, Revenue and Cost Models

What are Intangible Assets?

To understand the concept of intangible assets it is important to first understand the broader accounting
concept. Assets are economic resources controlled by an entity whose value can be objectively measured at the
time that it is acquired. Firms have traditionally accounted for four key categories of assets. First, current assets
are those resources held for a short timeusually correlated to a firms fiscal reporting cycle, which in the U.S.
has traditionally been 1 year. Second, tangible assets include: (1) property, plant, and equipment (often called
fixed assets) acquired to produce the goods and services that generate revenues; and (2) inventory held for
resale. Third, investments are securities of one company that are owned by another to either control the other
company or in anticipation of earning a return from the investment. Finally, intangible assets are non-
physical economic resources that are controlled by a business and provide measurable value. They
traditionally include only those resources that can be objectively measured, for example, goodwill, patents,
copyrights, etc.

As we enter the 21st century, this orderly approach to accounting for asset value has become inadequate. The
center of gravity in terms of a firms economic resources is shifting from assets that can be measured
objectively (such as physical assets and goodwill) to intangible assets (such as brand equity and customer
loyalty) for which new measures must be created.

Asset categories and definitions are below.

Sample Asset Categories and Descriptions

Current Assets
Asset Category Description
Financial Assets Accounts receivable.
Cash and convertible notes.
Marketable Investments made as part of a cash management program.
Tangible Assets
Asset Category Description
Property, Plant Physical facilities.
and Equipment Fixed assets required to produce goods and services.
Inventory Assets held for re-sale.
Asset Category Description
Securities Stock held by one firm to enable joint control over shared business activities.
Stock held by one firm in anticipation of a return at some time in the future.
Real Estate Investment in property in anticipation of a future return.

Crafting E-Business Models

Sample Asset Categories and Descriptions (continued)

Intangible Assets
Asset Category Description
Relationships Breadth and depth of relationships with customers and the business community.
Loyalty and commitment of customers and business community members.
Strength of Strong brand recognition among business and consumer communities (includes corporate brand,
Online & Offline business unit brands, product brands and global brand).
Brand Ability to generate strong personal identification with brand.
Ability to leverage Internet brand image.
Reputation and image.
Knowledge & Experience, skills and intellectual capabilities of employees and partners.
Expertise Understanding of market and business dynamics.
Scope and granularity of stored information.
Flexibility and ease of accessing, customizing and distributing information.
Information literacy.
Understanding of technical and business evolution and ability to identify opportunities and threats.
Agility & Ability to quickly recognize and act on new opportunities and threats.
Responsiveness Ability to access and efficiently utilize resources required to execute strategy.
Ability to capture the attention and mobilize the commitment of customers and members of the business
community to implement new strategies.
Intellectual Patents, copyrights, etc. for which an objective measure of value can be assessed.
Goodwill Value of an acquired company over and above current and tangible assets.
The value of an acquired company's "franchise"e.g., loyalty of its customers, the expertise of its
employeesthat can be objectively measured at the time of a sale or change of control.

Sample Revenue Options

Commerce Revenues
Revenue Category Description
Product Sales Sell or license physical or information-based products.
Commission, Service Charge a fee for services provided; can be a set fee or a % of the cost of a product or service.
or Transaction Fees
Content Revenues
Revenue Category Description
Subscription Fees Charge for receipt of updated information on a particular topic or a broad range of topics for a
specified period of time (e.g., annual).
Registration or Event Charge a fee for attendance at an online event, workshop or course.

Crafting E-Business Models

Sample Revenue Options (continued)

Community Revenues
Revenue Category Description
Advertising, Slotting, Collect a fee for hosting a banner advertisement or special promotion.
Affiliate & Referral Collect a fee for an exclusive or non-exclusive partnership relationship.
Collect a fee each time a visitor clicks through from your site to another companys site.
Membership Fees Charge a fee to belong to a private group or service.
Infrastructure Revenues
Revenue Category Description
Software/Hardware Sell or license a technology product.
Installation and Charge either a set or variable fee for services provided; large-scale fixed price projects are
Integration Fees often broken into a series of discrete projects with well-defined timeframes and deliverables;
variable fees are often based on time, materials and expenses incurred while working on a
Maintenance & Charge a fee for software/hardware maintenance & updates.
Update Fees
Hosting Fees Charge a fee for hosting a software application, web site, data center or network.
Access Fees Charge a fee for providing access to a network and/or to an Internet service.

Sample Cost Categories

Cost Category Description

People & Partners Cost to acquire, develop and retain skills and expertise needed to execute strategy; includes
employees and partnerships.
Advertising, Cost of offline and online advertising, marketing and sales.
Marketing, Sales
Business Cost of designing and launching new businesses, developing alliances and acquiring partners.
Materials & Supplies Cost of physical materials used in production of products and delivery of services; includes
general purpose and specialized supplies and components.
Specialized Cost of equipmentespecially capital equipmentused in design, production, delivery, and
Equipment distribution.
(does not include IT)
Research & Cost of designing and developing digital business products and services; may overlap with IT
Development infrastructure costs.
Physical Facilities and Cost of corporate and regional headquarters, sales offices, factories, warehouses, distribution
Infrastructure centers, retail stores, service centers etc.
Information Cost of computers and equipment (e.g., printers, data storage devices).
Technology (IT) Cost to operate and maintain data centers.
Cost to design, develop, implement and maintain software.
Cost of voice, data and video network equipment (e.g., physical cables, routers).
Cost to operate and maintain networks.

Crafting E-Business Models

Crafting E-Business Models

Appendix B
E-Business Models
Focused Distributor E-Business Models
Model & Examples Model Differentiators Likely Costs
Likely (Note: on the Internet,
(Visit each company Control Sell Price Set Physical Revenues people, partners, and
web site to analyze Inventory Online Online Product/Svc business development
online offerings.) costs are universally high)
Retailer Advertising & marketing;
Amazon.com Product/svc. Physical facilities,
LandsEnd.com Yes Yes No Yes sales inventory & customer svc.;
Walmart.com R&D; IT infrastructure
Marketplace Transaction fees; Advertising & marketing;
E-Loan Possibly Yes No No Service fees; R&D; IT infrastructure
QuickenInsurance Commissions
InsWeb Referral fees; Advertising & marketing;
AutoWeb.com No No No Possibly Advertising & R&D; IT infrastructure
marketing fees

Internet Securities Subscription Content/info asset mgmt.;
Individual.com No Possibly No No fees; Advertising Advertising & marketing;
and marketing Technical infrastructure
Exchange Advertising & marketing;
Amazon.com (B-2-C) Depends on Staff support for auctions
EBay (C-2-C) Possibly Possibly Yes Possibly model (especially B-2-B);
PriceLine (C-2-B) Inventory & logistics if
FreeMarkets (B-2-B) inventory control; R&D;
Technical infrastructure
Focused distributors that do not allow customers and the business community to transact business
Trends online are losing power. Aggregator and pure info broker infomediary models are at risk.
Multiple business models are required to ensure flexibility and sustainability.
Focused distributors must align closely with vertical and horizontal portals or evolve their model to
become vertical portals.

Crafting E-Business Models

Portal E-Business Models

Model & Examples Model Differentiators Likely Costs
(Note: on the Internet,
(Visit each company Gateway Deep Affinity Likely Revenues people, partners and
web site to analyze Access Content & Group business development
online offerings.) Solutions Focus costs are universally
Horizontal Portals Through Possibly; Advertising, Advertising, marketing
AOL partnerships Often through affiliation & slotting & sales; Content/info
Yahoo! Yes with vertical partnerships fees; Possibly asset mgmt.; R&D; IT
iWon.com & affinity subscription or infrastructure
Virgin.com portals access fees
Vertical Portals Transaction fees; Advertising, marketing
Quicken.com Limited Yes No Commissions; & sales; Content/info
Healtheon/WebMD Advertising, asset mgmt.; R&D; IT
affiliation & slotting infrastructure
Affinity Portals Advertising, marketing
Women.com Within affinity Referral fees; & sales; Content/info
Womens Financial Possibly group Yes Advertising, asset mgmt.; R&D; IT
Network affiliation & slotting infrastructure
TheKnot fees
Horizontal and vertical portals are emerging as dominant sources of power within E-
Business markets.
Horizontal portals are joining forces with horizontal infrastructure portals to provide not just
Trends access to content but also access to the network and hosting services;
Mega broadcast portals that combine voice, video, data and entertainment are emerging in
the consumer space;
Mega B-2-B portals provide both horizontal access to business networks and vertical
industry-wide solutions.

Crafting E-Business Models

Producer E-Business Models

Model & Examples Model Differentiators Likely Costs
(Note: on the Internet,
(Visit each company web Level of Likely Revenues people, partners and
site to analyze online Sell/Serve Sell/Serve Customization business development
offerings.) Online Offline costs are universally
Manufacturers Product sales; Advertising, marketing
Ford.com Service fees & sales; Content/info
GE.com Yes Yes Low to asset mgmt.; R&D; IT
Medtronic.com Moderate infrastructure
Service Providers Commission, Advertising, marketing
American Express service or & sales; Content/info
eCoverage.com Yes Possibly Moderate to transaction fees; asset mgmt.; R&D; IT
American Airlines High infrastructure
Educators Registration or Content/info asset
ECollege.com Yes Possibly Moderate to event fee; mgmt.; R&D; IT
Harvard Business School High Subscription fee; infrastructure
Pensare.com Hosting fee
Advisors Subscription fee; Content/info asset
Ernst & Young (ey.com) Registration or mgmt.; IT
Knowledge Universe Yes Usually Moderate to event fee; infrastructure
(knowledgeeu.com) High Membership fee;
Mainspring.com Commission,
transaction or
service fee
Information & News Subscription fee; Content/info asset
Services Yes Possibly Moderate to Commission, mgmt.; Advertising,
Financial Times (ft.com) High transaction or marketing & sales; IT
Forrester service fee infrastructure
Custom Suppliers Advertising, marketing
Boeing Product sales; & sales; Content/info
Dell (will be discussed Yes Yes High service fees asset mgmt.; R&D; IT
under IT Infrastructure infrastructure
McGraw Hill
Producers must be best-in-classthe #1 or #2 brandto survive.
Some large full service producers, like American Express and Citigroup in the financial
Trends services industry, are acquiring firms that offer a full range of products and services to
become producer vertical portals.
Industry supplier coalitions are forming to enable business-to-business (B-2-B)
commerce within industry groups and with key business customers.

Crafting E-Business Models

Infrastructure Provider E-Business Models

Infrastructure Model Differentiators Likely Costs
Distributor Models & Likely (Note: on the Internet,
Examples Control Sell Online Price Set Physical Revenues people, partners and
Inventory Online Product/Svc business
(Visit company web site development costs
to analyze offerings.) are universally high)
Infrastructure Retailers Advertising &
CompUSA.com Product/svc. marketing; Physical
Staples.com Yes Yes Not Usually Yes sales facilities, inventory &
customer svc.; R&D;
IT infrastructure
Infrastructure Transaction Advertising &
Marketplaces Usually Yes May enable Yes fees; Service marketing; R&D; IT
IngramMicro some fees; infrastructure
TechData bidding Commission
Infrastructure Advertising &
Exchanges Depends on marketing; Staff
NECX.com Possibly Possibly Yes Yes model support for auctions
Egghead/Onsale.com (especially B-2-B);
(www.egghead.com) Inventory & logistics if
inventory control;
R&D; Technical

Infrastructure Portal Model Differentiators Likely Costs

Models & Examples (Note: on the Internet,
Gateway Content, Hosting Likely Revenues people, partners and
(Visit company web sites Access & Commerce, Services business development
to analyze offerings.) Hosting Community costs are universally high)
Horizontal Through Access fees; R&D; IT infrastructure;
Infrastructure Portals partnerships Commission, service or Advertising, marketing and
AOL Yes with non- Yes transaction fees; sales
AT&T infrastructure Subscription fees;
USWeb/CKS portals & Hosting fees
(www.usweb.com) ASPs
Vertical Infrastructure Licensing fees; Service Advertising, marketing &
Portals (Application & transaction fees; sales; Content/info asset
Service ProvidersASPs) Usually Yes Usually Maintenance & update mgmt.; R&D; IT
Oracle Business Online; fees; Hosting fees infrastructure
Sales.com; Ventro

Crafting E-Business Models

Infrastructure Provider E-Business Models (continued)

Models & Examples Model Differentiators Likely Costs
Likely Revenues (Note: on the Internet,
(Visit company web sites Sell/Serve Sell/Serve Customi- people, partners and
to analyze offerings.) Online Offline zation business development
costs are universally
Equipment/ Product license or R&D; Advertising,
Component sales; Installation & marketing and sales;
Manufacturers Yes Yes Low to integration fees; Production; Physical
IBM Moderate Maintenance, update & facilities &
Compaq service fees infrastructure;
Cisco Specialized equipment,
Lucent materials & supplies; IT
Software Firms Product license or R&D; Advertising,
Ariba sales; Installation & marketing and sales;
Microsoft Yes Yes Moderate integration fees; Production; Physical
Oracle to High Maintenance, update & facilities &
Siebel service fees infrastructure;
SilkNet/Kana Specialized equipment,
materials & supplies; IT
Infrastructure Services Commission, service Content/info asset
Firms or transaction fee; mgmt.; R&D; IT
Agency.com Yes Yes High Hosting fee infrastructure
Federal Express
Custom Suppliers - Product/service sales; R&D; Physical facilities,
Hardware Licensing fee; equipment & supplies;
Dell Yes Usually High Installation & Production; Content/info
MicroAge (channel integration fees; asset mgmt.; IT
assembly and system Maintenance, update & infrastructure
integration) after-sales service fee
Custom Suppliers - Service & consulting Service delivery
Software fees; System expenses; Design &
Andersen Consulting Sometimes Yes High integration fees programming expenses;
Sapient Content/info asset
Viant mgmt.; Business
The rigid lines between digital infrastructure providers and the digital businesses built on
top of the infrastructure are beginning to blur. Horizontal portals such as AOL are
vertically-integrating with horizontal infrastructure providers, such as Time-Warners cable
networks. And, digital businesses, such as Ventro, are becoming ASPs, software firms
and web hosting providers.
Trends Globalization of the technical infrastructure standards is enabling emergence of global
infrastructure portals.
As we enter the 21st century, there are two competing ASP models: producer-ASPs (for
example, Oracle, Siebel, SAP) provide online access to their brand-name software;
distributor-ASPs (for example, US Internetworking) offer a full suite of Internet hosting and
integration services across a broad range of software brands.
Many hardware and software producers were early adopters of online commerce, selling
to Internet-savvy customers. In many cases they have been able to bypass channel
intermediaries and/or create their own portals. For example, Cisco has an impressive
lead with over 80% of their products coming from online sales.

Crafting E-Business Models

Appendix C

Comparing Focused Distributors: E-Loan, InsWeb, and FreeMarkets


E-Loan (www.eloan.com) is an excellent example of the online marketplace e-business

model.49 Founded in 1992 as Palo Alto Funding, the company changed its name to E-Loan in 1996.
The company went public in June 1999 and was named the number one online mortgage provider by
Gomez.com (www.gomez.com) in the fall of 1999. E-Loan is a licensed mortgage broker in 45 states
and the District of Columbia. The company has partnered with Net.Bank to fund loans under the E-
Loan brand in the remaining five states.

By the end of 1999, E-Loan linked over 70 lenders to consumers who wished to purchase
residential mortgages. E-Loan originated 8,870 online loans during calendar year 1999; this
represented 54% of all online loansup from 4% in the second quarter of 1999. E-Loan generated
traffic through both online and offline advertising and exclusive and non-exclusive agreements with
portals such as Yahoo! and CBS Marketwatch. In January 2000, the site had 342 unique visitors, each
of which spent an average of 3.4 minutes on the site.50

During 1999, the company expanded beyond its residential mortgage entry position and
strong California geographic presence to offer over 50,000 loan products, including mortgages, home
equity lines, credit cards (through a partnership with Providian), auto loans (through the acquisition
of CarFinance.com), and small business loans (through a partnership with Loanwise.com). In
addition, E-Loan partnered with Softbank and other overseas companies to extend geographic
coverage outside of the U.S. The companys goal was to offer consumers a complete solution for debt
products worldwide.

E-Loans proprietary technology automated all phases of the loan origination process,
including Rate Search (which personalized individual consumer profiles and which was updated
multiple times every day), Loan Comparison (allowing potential borrowers to compare loan products
based on rate, points per payment, interest rates and costs over time), Loan Recommendations (which
made recommendations based on borrowers investment objectives, hold periods, expected interest
rate scenarios, and loan amounts), Loan Application (enabling borrowers to apply online), and Loan
Tracking (allowing borrowers to track the status of an application and anticipated closing costs online
with information updated in real-time). Consumers could also predefine an interest rate target using
Rate Watch; E-Loan software scanned its up-to-the-minute loan database and notified the potential
borrower if a suitable product was found. Mortgage Monitor allowed individuals to compare an
existing mortgage with products in the E-Loan database. In addition, educational products for
consumers and a variety of services for realtors to use in assisting clients to obtain mortgages were
also available.

Reflecting the evolution of its product/market strategy, E-Loan also evolved its revenue, cost
and asset models. Initially, the company served only as an online aggregator, originating and
completing the loan application process but forwarding it on to a lender for funding and closing the

49 Information on E-Loan was obtained from the companys web site, its S1 document filed in March 1999, and the following
analyst reports: Bove, R., Vinciquerra, M., E-Loan, Inc., Raymond James, December 1, 1999; Daniel, V., and Eisman, S., E-
Loan, Inc., CIBC World Markets, November 18, 1999; and Glossman, D et. al., E-Loan, Inc. Lehman Brothers, January 25,
50 Internet Financial Services Jan. 00 Traffic Trends (Media Metrix) Part 2, Salomon Smith Barney, as reported by First Call,
February 24, 2000 (www.firstcall.com).

Crafting E-Business Models

loan. In June 1998, E-Loan began closing its own loans, thus completing the sale to investors and
evolving to a marketplace business model. By 1999, the company had also begun funding its own
loans, presaging its evolution to a producer-distributor model in the future.

When operating as an aggregator/broker, E-Loan earned $395 per loan as a processing fee
and 50 basis points as an origination fee.51 (For example, on a $150,000 brokered loan, the company
earned a $750 loan origination fee, which brought the total transaction fee to $1,145). As a
marketplace (agent), the company earned $570 in additional processing fees and 37.5 basis points in
underwriting fees. In addition, the company earned additional revenues from interest generated
between the time E-Loan funded the loan and the time it was sold to the purchaser (about 14 days in
early 2000). This brought the total transaction fee on a $150,000 loan to more than $2,280 plus

In early 2000, E-Loan continued to serve as a loan aggregator for auto loansfunding and
closing was done by partner Bank of Americaearning approximately $325 per loan. 1999 revenues
were approximately $22 million, with mortgage loans accounting for 85% of revenues, car loans for
9%, and credit cards for 6%. Lehman Brothers analysts predicted 2000 revenues to climb to $39.8
million (65% mortgages, 30% auto, and 5% credit card).

During 1999, expenses as a % of revenue decreased in every expense category. In 1999, total
operating expenses were approximately $98.2 million (sales and marketing = $30.3 million;
operations = $22.8 million; and technology development $3.6 million). Although still not profitable,
the company expected that the shift in its business model from an aggregator to a marketplace and
producer (underwriting its own loans) would expand its revenue model while not significantly
increasing costs.

As an online insurance aggregator, InsWeb (www.insweb.com), founded in 1995, did not sell
insurance online. Instead, the company received referral fees on every qualified lead sent to a
carrier for referral to a physical agent. While quotesare provided free to consumers, the
companys S1 stated, insurance company partners pay transaction fees [on] qualified leads.52
Qualified leads are produced in two ways, the S1 continued:
Insurance companies that offer consumers instant online quotes are charged
for a qualified lead when a consumer requests insurance coverage based on a specific
quote; insurance companies that provide e-mail or offline quotes are charged for a
qualified lead when the consumer clicks to request the quote itself. In either case,
referral fees are paid whether or not the consumer actually purchases an insurance
policy from the company, and revenue from transaction fees are recognized at the
time the qualified lead is delivered to the insurance company.
Aggregators like InsWeb solve the problem of uncertain referral fee revenue streams by
adopting new business models and their associated revenue stream. For example, in addition to
being an online aggregator, InsWeb, was also an ASP, leasing insurance quoting, comparison and
application software to their insurance carrier suppliers, and charging integration, maintenance, and
application hosting fees. In 1999, these system development, integration, and hosting revenues
provided $2.4 million of the companys $21.8 million total 1999 revenues.

51 Detailed revenue data was obtained from Glossman, D. et. al., E-Loan, Inc., Lehman Brothers, January 25,
52 InsWeb, Inc., S1, filed May 1999. An S1 is a document that a company files with the Security and Exchange
Commission to inform regulatory agencies and investors that it plans to go public.
Crafting E-Business Models

It typically took about 20 people to work with each insurance carrier partner to integrate
InsWebs custom software with the carriers technical systems, and the integration typically took 2 3
months to complete. InsWebs main data center was located in the companys Redwood City,
California, corporate headquarters and a back-up data center was outsourced to a web hosting
company. In their May 1999 S1, InsWeb reported that product development expenseslargely
related to software development, data center and network operations, and payroll for technical
professionalsincreased from $2.9 million in 1996 to $8.9 million in 1999. Total 1999 expenses were
$60.2 millionup from $26.2 million in 1998.

To generate traffic to its site, InsWeb had entered into over 115 distribution agreements with
portals, including Yahoo!, E*Trade, Snap.com, and LookSmart.com.53 These online relationships
generated approximately 45% of InsWebs traffic. Each relationship was typically for a year, was
terminable with one- to three-months notice, and was not automatically renewable. Approximately
20% of InsWebs traffic was generated from its relationship with Yahoo!. Under the terms of the
agreement, InsWeb paid Yahoo! a fixed fee plus approximately $.10 for each referral. As of June 30,
1999, Salomon Smith Barney analysts reported that InsWeb paid Yahoo! fixed fees totaling $4.7
million and referral fees totaling $139,000. InsWeb was obligated to pay additional fees totaling $4.8
million through June 2000. In return, InsWeb was the exclusive merchant within Yahoo!s Insurance
Center. Overall, InsWeb reported 1999 sales and marketing expenses of $33.5 millionup from $3.2
million in 1997 and $9 million in 1998.54 In fall 1999, InsWeb announced a $75 million advertising
campaign that would include expansion of its online distribution partner network and an increase in
online and offline advertising.

Founded in 1995, FreeMarkets (www.freemarkets.com) became the leading business-to-
business exchange. In 1999, the company auctioned nearly $2.7 billion in purchase orders for
industrial parts, raw materials, commodities, and services.55 Over 3,000 suppliers from over 45
countries, representing over 70 supply verticals, had participated in FreeMarkets auctions. During
1999, FreeMarkets served over 35 clientsup from 12 in 1998. FreeMarkets digital business
infrastructure included proprietary online auction transaction systems, market making rules and
expert system support, global supplier databases and research services, industrial market making
services, and call center support (in over 30 languages) to buyers and sellers.

In 1999, FreeMarkets earned revenues in three ways. The primary source of revenue was
from fixed monthly fees paid by customers. The monthly fees covered the use of technology,
information, market operations staff, market-making staff, and facilities. Negotiated monthly fees
varied by customer and reflected the anticipated auction volume and the staffing, expertise, and
technology required to complete the services requested by the clients. Salomon Smith Barney
analysts estimated that these fees averaged approximately 1% of the value of the $1.4 billion total
during fourth quarter 1999 transactions. Second, the company earned performance-based fees when
savings achieved through a FreeMarkets auction exceeded an agreed-upon level. These fees varied
from customer-to-customer but rarely exceeded 10%. In its 1999 annual report, the company
estimated that it saved a customer from 2% to 25% in the cost of supplies. Finally, in some instances,
FreeMarkets earned sales commissions paid by either the customer or supplier at the time that the
customer took possession of the goods or services. In 1999, FreeMarkets earned $20.9 million in total
revenuesup from $7.8 million in 1998.

53 Zandi, R. and Vetto, M., InsWeb, Inc., Salomon Smith Barney, November 24, 1999.
54 InsWeb, Inc., S1, filed May 1999.
55 FreeMarkets Online, Salomon Smith Barney, February 23, 2000.

Crafting E-Business Models

Cost of revenues consisted primarily of expenses related to: (1) staffing the market making
services organization, (2) developing and operating the technology infrastructure, and (3) overhead
and depreciation. Operating costs were grouped into two general categories. Research and
development costsprimarily related to the development of the companys proprietary software and
other marketing-making technologies. Sales and marketing expensesprimarily related to salaries
and benefits for the companys 27-person direct sales forceand travel, public relations, promotional
materials, and advertising and marketing programs. In 1999, the company did not participate in any
revenue-sharing distribution relationships, nor did it resell, rebrand, or license its technology to third
parties. Finally, general and administrative expenses consisted primarily of personnel salaries and
benefits for corporate personnel and fees for outside advisors. Of the total 1999 expenses ($43.6
million), $12.2 million were related to costs of revenues and $31.4 were related to operating expenses.
Operating expenses were broken down as follows: $4.9 million in R&D; $11.9 million in Sales &
Marketing. The company spent $9.3 million in G&A.

Crafting E-Business Models

Appendix D:

Comparing Portal Models: AOL, Yahoo! and drkoop.com

America Online (AOL)
Founded in 1985, AOL (www.aol.com) described itself as the worlds leader in interactive
services, web brands, Internet technologies and eCommerce services.56 Its multi-faceted, hybrid
model is representative of the trend toward a robust mega-portal that artfully blends a variety of
digital business and digital infrastructure models.

In addition to its AOL Internet brand, which incorporated 19 vertical and affinity portals
along with its horizontal content and services, the company also operated two separate brand-name
portalsCompuServe and Netscape Netcenter. In its 1999 annual report, CEO Steve Case reported
that the companys advertising revenues from its portal business model grew 84% during 1999,
surpassing $1 billion.57 In addition, by year-end 1999, commerce revenues (affiliate and transaction
fees charged to merchants for selling products and services through AOLs vertical portals)
accounted for 21% of total 1999 revenues of $4.8 billion. Because of the long-term nature of its
advertising and marketing deals, AOL also reported committed advertising revenues of $1.5 billion
for fiscal year 2000.

Reflecting its roots as a proprietary consumer network services and content company, AOL
also operated as an Internet Service Provider (ISP), charging monthly subscription fees to its over 21
million subscribers in 14 different countries and 7 different languages. In 1999, subscription
revenueswhich accounted for 69.5% of AOLs total revenuessurpassed $3 billion, up from $2.1
billion in 1998. AOL subscription services provided access to the Internet and a wide range of unique
AOL and vertical portal content, e-mail and instant messaging services, search capabilities, directory
services, and a wide range of other specialized community features.58

AOLs acquisition of Netscape, in 1998, extended its business model yet again, and the firm
became a leading provider of Internet browser, e-mail, calendaring, and collaboration software. A
partnership with Sun Microsystemsannounced at the same timeenabled AOL/Netscape to also
become a leading provider of eCommerce solutions for small, medium, and large corporations
worldwide. Software licensing and sales revenues were $456 million (9.5% of total revenues)up
from $365 million in 1998.

Key cost categories in 1999, included: network and data center operations ($2.6 billion56%
of the companys total costs of $4.3 billion); sales and marketing ($808 million16.9%); product
development ($286 million6%); and administrative costs ($408 million8.5%). During 1999, the
company generated more than $1 billion in cash.

Looking ahead in March 2000, the proposed AOL/Time-Warner merger (announced January
10, 2000) coupled with the rapid penetration of broadband to the home, MP3 music download
standards, and the launch of AOL TV in summer 2000, suggests that the horizontal portal of the
future will seamlessly blend Internet, television, video-on-demand, and radio broadcast channels to

56 AOL company web site (www.corp.aol.com).

57 Information on the AOL revenue and cost models was obtained through the companys 1999 annual report.
58 While AOL continued to charge a fee for its ISP/Portal information and services in the U.S., in 1999, AOL
announced the launch of a free ISP/Portal, Netscape Online, in the U.K. This free service was designed to
compete with the growing number of free ISPs available in Europe.
Crafting E-Business Models

create a media conglomerate that will link homes and businesses around the world. An AOL press
release announcing the merger of AOLs powerful Internet brand and assets with TimeWarners
powerful media and communications brand and assets stressed that the company would be the
worlds first Internet Age Media and Communications company. The new firm would have
combined revenues of over $30 billion.59 In partnership with DIRECTV, Hughes Network Systems,
Phillips Electronics, Liberate Technologies, and Gemstar, AOL also announced plans to sell web-
enabled interactive TV set-top boxes in retail stores by summer 2000. Commenting on the announced
launch of AOL TV, Merrill Lynch Analyst, Henry Blodget estimated that 30 50% of AOL
households would sign up for AOL TV shortly after the announcement.60 This is a profoundly
important next step in the development of the medium, Blodget commented. We regard it as
analogous to Microsofts control of the PC.
Like AOL, Yahoo! is a portal that provides both horizontal content and services (e.g., e-mail,
community services) and access to a variety of vertical portals (including finance, health,
entertainment, etc.) and shopping. Since its founding in 1995, Yahoo!s strategy was to establish
close, long-term relationships with a large audience of Web users. During December 1999, the
companys global audience grew to more than 120 million unique users (100 million registered users),
double the number during the same period in 1998. Embarking on an aggressive globalization
strategy, Yahoo!s user base outside the U.S. exceeded 40 million at year-end 1999 and its non-U.S.
operations represented 13% of total consolidated revenues during the fourth quarter. During 1999,
the company also significantly expanded its media business through the launch of audio and video
content services.

Another key component of Yahoo!s strategy was to leverage its large installed base to be the
worlds largest enabler of transactions.61 During 1999, more than 9,000 merchants sold
merchandise on Yahoo! shopping and, during the 1999 holiday season, Yahoo! was one of the leading
shopping destinations with a weekly average of more than 3 million shoppers.

Unlike AOL (who in recent years took ownership of the digital infrastructure and extended
the provision of its digital infrastructure portal services), Yahoo! favored partnership arrangements
with ISPs, hardware and software providers, personal digital assistant providers and wireless
infrastructure portals. The company touted its status as an independent distribution platform as its
major focus of differentiation and a key to the companys success.

Indeed, Yahoo! was profitable in 1999a claim that few pure-play dot-com businesses
could make. Revenues for 1999 were $589 million and income from operations was $67 million, up
from $245 million and a loss of $13 million in 1998. In 1999, operating expenses were $420 million
(including sales and marketing costs of $209 million, product development costs of $64 million and
general and administrative costs of $35 million). Yahoo!s Chairman and CEO, Tim Koogle,

We exited 1999 as one of the top three global branded networks. Throughout
the year, we leveraged the inherent scale in our business and carefully managed our
business model to deliver superior results to our users, clients, partners, and

59 AOL & Time Warner Will Merge To Create World's First Internet-Age Media & Communications Company,
AOL company press release, January 10, 2000 (www.aol.com).
60 Hu, J. and Pelline, J., Wall Street Gets Glimpse of AOL TV, CNet News.com, February 11, 2000.
61 Yahoo! Reports Fourth Quarter and 1999 Fiscal Year-End Financial Results, Yahoo! company press release,
January 11, 2000.
Crafting E-Business Models

stockholders. We are well positioned to continue our leadership position in the year
ahead, and will continue growing our business on all fronts.62

Drkoop.com: a Portal in Trouble

Launched in July 1998 and building off of the strong Dr. C. Everett Koop brand name,
drkoop.com was a healthcare vertical portal. In the words of its founders, drkoop empowers
consumers with the information and resources they need to become active participants in the
management of their own health.63 With healthcare spending estimated at $3 trillion in 1999 (15% of
the U.S. Gross Domestic Product), healthcare represented a large vertical market opportunity.64

drkoop.com had over 11.8 million unique visitors during the fourth quarter of 1999, and over
1 million registered users. Because of its strong brand recognition and reach, the company had been
able to sign affiliate agreements with over 300 healthcare facilities and 18 television stations.
Through an agreement with Shared Medical Systemsa major provider of healthcare software and
technology outsourcingdrkoop.com hoped to provide the infrastructure to extend its reach into
physician and healthcare provider networks, while providing consumers with a personalized medical
record. In so doing, they would create a link between 280 million U.S. consumers, 450,000
physicians, and 7,000 hospitals in the healthcare community.

In 1999, drkoop.com generated $9.4 million in revenuesup from $43,000 in 1998.65 The
majority of these revenues ($7.7 million) were from advertising, and the company had a $50 million
backlog in committed advertising revenues. Other revenues included $1.7 million from subscriptions
and $60,000 from commerce. For the healthcare industry as a whole, advertising revenues in 1998
exceeded $10 billion and were expected to grow to $40 billion by 2005. On the commerce side, 1998
healthcare industry revenues exceeded $150 billion and were expected to grow to $300 billion by
2005. Given its strong brand and market momentum, analysts expected that drkoop.com would have
a tremendous growth opportunity.66

But these rapid growth goals came at significant costs for the company. Expenses for 1999
exceeded $55.9 million, up from $9.2 million in 1998. By far the largest single expense was marketing
and sales ($45.5 millionup from $2.6 million in 1998). High customer acquisition costs were typical
of rapidly growing vertical portals, and executives expected that the company would be able to
amortize its customer base and brand in going forward. Although there was evidence that this
strategy had worked for other high profile Internet brandsfor example, Amazon.com and AOLit
remained to be seen whether it would continue to work in the future. In fact, when it released its
1999 annual report on March 31, 1999, the companys auditors, PriceWaterhouseCoopers, stated that
it had substantial doubt about [the companys] ability to continue as a going concern. During the
early months of 2000, the stock price had dropped from its 52-week high of $45.75 to the $5-$6 range.
On the day that the annual report was filed, the stock dropped to $3.69.67

62 Yahoo! Reports Fourth Quarter and 1999 Fiscal Year-End Financial Results, Yahoo! company press release,
January 11, 2000.
63 DrKoop.com web site, www.drkoop.com (March 5, 2000).
64 Russ, M., et .al., Drkoop.com, Robinson-Humphrey, November 11, 1999.
65 DrKoop Grows Revenue By 75% to $5.1 Million in Q4, DrKoop.com company press release, February 15,
66 Russ, M., et. al., Drkoop.com, Robinson-Humphrey, November 11, 1999; Fitzgibbons, S., Drkoop.com,
Hambrecht and Quist, February 2, 2000; Hamid, K., Drkoop.com, Tucker, Anthony, Cleary, Gull, October 18,
67 Farmer, M., DrKoop Latest Dot-com To Run Low On Cash, (www.cnet.com) March 31, 2000.