Many of today’s entrepreneurs — from pedigreed MBA graduates to shady con artists — view the Internet as the easiest path to success.
Who could blame them? With millions of web sites in existence — and hundreds of thousands being added every day — the Internet seems capable of supporting limitless business opportunity. Reports of low barriers to entry and Wall Street’s fatal attraction to Internet stocks haven’t hurt this perception either.
Yet the global online village is already showing signs of overcrowding. Millions of web sites also means millions of competitors. The high-profile Internet mergers and acquisitions in recent months only mark the beginning of further industry consolidation.
Is the window of Internet opportunity closing? Hardly. But you had better first understand the nature of Internet competition before writing your business plan. You may discover that specialization is the Internet entrepreneur’s greatest strategic asset.
The Geography Penalty
E-commerce, we were told, was going to liberate small business from the geography penalty — where the market forces of “location, location, location” make retailers choose between high-priced real estate or anonymity (or worse yet, bankruptcy). In truth, the so-called geography penalty is also an ally to many businesses. Geography often insulates businesses from direct competition, preserves greater margins, and staves off consolidation.
In the bricks-and-mortar world, the local video rental store usually doesn’t concern itself with the Movie Monstrosity Warehouse chain until one is about to move in across the street. A convenient location also allows local retailers to charge more for their products, and thus survive, despite the existence of wholesalers and category killers.
But on the Internet, geographical barriers are all but eliminated. Competition is direct and immediate. Consumers have direct visibility into retailers’ pricing structures, and profit margins are reduced to bare minimums.
Internet Consolidation 101
While few analysts listed consolidation among their 1998 predictions for the Internet industry, it should come as no surprise. Consolidation plays a natural role in any growing, maturing industry. In the 1920s, there were some 400 domestic automobile manufacturers — with over 100 in the Los Angeles area alone. Today, there are only two.
In the past year there have been too many portal mergers and acquisitions to mention. Within online retailing alone we’ve witnessed consolidations from N2K and CDNow in music, Hollywood and Reel.com in videos, and Beyond.com and BuyDirect.com in software.
While any competitive industry is subject to consolidation, online businesses seem subject to extraordinary pressures to consolidate. More than just the streamlining of operations, online businesses will arguably experience greater competition simply because they lack the geography penalty.
For example, the geographic distribution of offline bookstores enables hundreds, if not thousands, of competitors to profitably co-exist. But who really needs more than a couple bookstore behemoths in the entire online world?
What would happen if all the nation’s bookstores were equidistant from your home? Is there really a difference between BarnesAndNoble.com and Borders.com? Beyond a few characters in their URLs, they’re identical down to the bruised egos of their offline counterparts.
Extend this logic across multiple business categories, and the Internet seems to need only a mere fraction of the businesses that exist in the offline world. If you’re looking to break into Internet business, this is hardly encouraging.
Yet somehow, like the same-sex dinosaurs that reproduced in Jurassic Park, nature (here the entrepreneurial spirit) always finds a way. This invariably happens by the creation of new markets or by targeting niche markets through specialization.
Media has a long history of successful specialization. Cable TV succeeded at the expense of network television because the major networks are too broad for significant targeting. Few viewers can tell the networks apart. If we asked you to name the TV network with lame sitcoms about white people mixed with a handful of legal dramas, would that narrow it down any? Sound like BarnesAndNoble.com and Borders.com?
Newer TV networks, such as WB and UPN, have also followed cable TV’s formula for success. While they didn’t bring us The Accordion Channel to capitalize on the wearable polka instrument demographic, they have survived by successfully targeting teens, minorities, and science fiction buffs (although not all at once — Lequisha, Teen Vulcan won’t be ready until next fall).
For specialization in online media, we’re just starting to witness the annointment of vertical portals as the jargon du jour. Like the major portals — e.g., Yahoo and Excite — vertical portals are web sites rich with information, tools, and features. However, unlike the major portals, they are designed to specifically cater to well-defined, niche audiences or interests. Sound like “The Accordion Channel?”
Earlier this month, CyberDialogue released a report espousing the virtues of verticalness for the entertainment industry. Former “destination site” CNET publicized its recent relaunch as the repositioning of the site as a vertical portal for the computing enthusiast. Longtime vertical portal advocate, VerticalNet, has amassed 1.8 million users among 33 sites targeting industrial trading communities — despite promoting URLs such as meatandpoultryonline.com.
Focus is difficult with scale, and the major portals are a mile wide. Theoretically, vertical portals should have the advantage of a precision focus, targeted users, and easier navigation.
But rather than competing, the major and vertical portals might develop symbiotic relationships — possibly through web syndication. Major portals will need best-of-breed content to strengthen their otherwise vanilla offerings, and vertical portals will need the mainstream exposure to drive traffic.
Specialization has also been a very successful strategy in the retail sector. The former dominance of department stores, such as Sears and Montgomery Ward, has been all but completely eroded by specialty retailers, such as The Gap and Circuit City.
For online retailers, the growing product girth of books, drugs, and rock-and-roll superstore, Amazon.com, seems menacing. But what if your online business focused on only mystery books and their avid readers? You could develop targeted promotions, author events, news, mailing lists, reviews, information, and a loyal online community that supports it all.
Large players typically emphasize size as their competitive advantage. You want to be the 800-pound gorilla that everyone has no choice but to do business with.
However, if you’re small and scrappy, it’s all about targeting your customers better than the next guy. It’s better to be the best in one or two narrow fields than to be an also-ran in dozens where you’re spread too thin.