Internet Business Models

Online technologies have brought about vast changes to our lives: in the way we work, communicate, socialise and more. The business community has been quick to adapt to, and, indeed, drive many of these global changes. This has necessarily meant changes to the models businesses operate under. Some of these changes are simply adaptations of existing industrial-era business practices to an online environment, while some new, entirely Internet-based models, are emerging which stand in stark contrast to traditional business practices.

A good example of the adaptation of existing business models to the internet business environment can be found in the retailing of electronic goods, household items, books and other physical items that were traditionally sold in bricks and mortar stores. Known as the merchant model (Duff, n.d.), this model involves business-to-consumer, or business-to-business transactions using websites as intermediaries. Many traditional businesses now supplement their established operations with an online presence; notable retailers such as JB Hifi, Harvey Norman, Coles and Woolworths all having strong on and offline business strategies.

An increasingly popular trend within this business model is the provision of ‘click and collect’ services, whereby consumers purchase products from a retailer’s website and collect the items from the retailer’s storefront. This hybrid business model offers advantages to both retailers and consumers, with the potential for innovative online marketing being matched with traditional after-sales services. However, the Internet has also provided the opportunity for new merchant model retailers to dispense with real-world storefronts entirely; large retail businesses like Kogan (Australia) and Amazon (USA) have no real-world stores, instead conducting all of their marketing, sales and customer services via the Internet.

In a twist to this online-only approach, some online businesses, such as Ebay and Chinese giant Alibaba (McGuinness, 2014) operate under a brokerage model – they provide the online space, marketing platform and network of consumers upon which retailers (and some manufacturers) market and sell their products. These brokerage sites (Duff, n.d.) charge fees on the resulting transactions.

The Internet also provides opportunities for manufacturers to provide services, and sales, directly to consumers. The manufacturer direct model, typified by Dell computers (Rappa, 2010) demonstrates the Internet’s capacity reduce businesses traditional reliance on intermediaries such as wholesalers and distributors. The Internet’s capacity for ‘disintermediation’ (the reduction or elimination of middlemen) (Bambury, 1998) has the potential to forge new markets and make new connections between producers and consumers of products in ways that were impossible a few short years ago. Take Etsy for example: this online-only business operating under the brokerage model provides a platform for millions of (mostly) small businesses who sell either hand-crafted or vintage (pre-owned) products (Etsy.com, 2016).

Introducing Netflix

While the above examples apply mostly to physical items, where ecommerce really departs from traditional business models is in the provision of purely electronic products. Digital content and its method of delivery (downloading from the Internet) allows products like music, video, images and software to be distributed without any physical product being transported (Bambury, 1998).

A well-known example of a business selling digital-only products is Netflix, a publicly-listed American company which provides video content (TV series and movies) to viewers via subscription. Netflix was not the first to combine the digital delivery model (for distribution), with the subscription model (for revenue) but it has been more successful than similar attempts made by the music industry (Small 2012). This success has been largely due to three factors: its video on demand (VOD) format, a highly effective search algorithm and its availability across devices and networks. The combination of these three factors with the business models utilised are what we call the ‘Netflix Effect’, and will be explored in greater depth in future articles.

 

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References

Bambury, P. (1998). A Taxonomy of Internet Commerce. First Monday, 3(10). doi:10.5210/fm.v3i10.624

Duff, n.d. http://smallbusiness.chron.com/internet-based-business-models-definition-909.html

Etsy.com, (2016). https://www.etsy.com/au/about/?ref=ftr

McGuinness, R. (2014). China’s own Google, Amazon and eBay rolled into one: The rise and rise of Alibaba. http://metro.co.uk/2014/05/12/chinas-own-google-amazon-and-ebay-rolled-into-one-the-rise-and-rise-of-alibaba-4725258/

Rappa, M. (2010). Managing the digital enterprise: Business models. http://digitalenterprise.org/models/models.html#Merchant

Small, O. (2012). “Reshaping The Music Distribution Model: An Itunes Opportunity”. Journal Of Media Business Studies 9 (4): 41-68.  doi:10.1080/16522354.2012.11073555.

 

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