book.chapter Assessing internet business value

In the rapidly evolving landscape of the Internet, understanding the valuation of online businesses becomes crucial for investors, Internet business managers, and managers without prior Internet experience. This understanding is facilitated through the application of three distinct frameworks: the Net Profit Evaluation, the Net Business Phases, and the Net Application Phases. Each framework serves a unique purpose in evaluating investment opportunities, analyzing business strategies, and deciding on the integration of web technologies to enhance business operations. The Net Profit Evaluation framework posits that an Internet-based business is poised for profitability if it exhibits certain characteristics. Firstly, the business must possess economic leverage, meaning it offers a product or service that holds significant value for its customers and is scarce enough to command a premium price. Secondly, the business should provide a comprehensive solution that delivers tangible economic benefits to its customers, often referred to as a closed-loop solution. Lastly, the management team's ability to navigate the swift currents of change in the digital realm is imperative. Businesses that embody these attributes are more likely to generate substantial profits and, consequently, attract higher market valuations. Transitioning to the Net Business Phases framework, it delineates the evolutionary path of most Internet businesses through three stages: Lossware, Brandware, and Powerware. Initially, companies in the Lossware phase grapple with low entry barriers, negligible switching costs for customers, and intense competition, leading to significant marketing expenditures without immediate profitability. As businesses progress to the Brandware phase, they succeed in establishing a recognizable brand, which simplifies the decision-making process for consumers and potentially leads to a reduction in comparative shopping. However, substantial marketing efforts remain necessary to navigate through industry consolidations. The ultimate goal is to reach the Powerware stage, where a business offers a scarce product with high switching costs, enabling it to enjoy consistently high returns. Despite many companies' aspirations to evolve from Lossware to Powerware, only a select few achieve this transformation. The third framework, the Net Application Phases, is particularly relevant for managers unfamiliar with the Internet. It outlines the incremental stages of integrating business operations with the web. The initial phase involves creating online brochures, where companies digitize their product literature, annual reports, and other informational content on their websites. The subsequent phase focuses on front-end transactions, enabling customers to place orders through the website, which are then processed through traditional fulfillment systems. The most advanced phase, Integrated Operations & Transactions, leverages the Internet for comprehensive interaction with customers, internal operations integration, and, in some instances, direct product and service delivery. While most companies commence their Internet journey with online brochures, advancing through the subsequent phases requires a strategic commitment to digital transformation. The Internet has emerged as a formidable economic and social force since the late 1990s, captivating the financial markets with stories of rapid wealth accumulation through digital ventures. This phenomenon presents a conundrum for managers and investors accustomed to valuing companies based on their future profit potential. The high valuations of many Internet companies, despite their minimal revenues and significant losses, pose a perplexing question: why are these entities valued more highly than larger, profitable companies? This dichotomy elicits a blend of eagerness to participate in the digital economy and apprehension regarding the sustainability of these valuations. Understanding the dynamics of the sectors in which these companies operate and identifying the strategic differentiators of market leaders are essential steps in navigating the complexities of the Internet business landscape.