Net Profit E-Book

David Soskin

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 382

Veröffentlichungsjahr: 2010

Beschreibung

"This book has been written by an experienced entrepreneur who has built a highly successful online business. He understands the challenges first hand, and gives readers invaluable advice about the how they too can make it big in the digital world."
—Luke Johnson, Chairman Risk Capital partners and Financial Times columnist

Online business can be a goldmine – or a minefield. David Soskin, former CEO of Cheapflights and Chairman of mySupermarket.co.uk, has faced all the problems thrown up by building a business on the Internet, and solved them. Here, he shows you how to:

• Convert a brilliant idea into something that actually pays
• Get the funding you need to expand
• Build a great team of staff and advisers
• Keep the cash flowing
• Go global! 

Net Profit provides much needed inspiration and reassurance for would-be start ups and established businesses who want to do more online.

"I wish this book had been written ten years ago when I first entered the e-commerce industry."
—Glenn Fogel, EVP - Corporate Development and International, Priceline.com

"David Soskin combines the insightful mind of a top consultant, the hardened vision of a serial entrepreneur, and the practicality of a successful businessman. Read this book!" 

 - Robin Buchanan, Adviser/Board member of multiple companies, previously the Dean and President of London Business School and also the UK Senior Partner of Bain & Company, the leading global consulting firm.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

Acknowledgements

PREFACE

ABOUT THE AUTHOR

Introduction

Chapter One - THE DIGITAL REVOLUTION–A SHORT HISTORY

Origins of the internet

The World Wide Web

The business of the internet begins

Early entrants

Surviving the ‘dot.com crash’

Early entrants: lessons for commercial success

Conclusions from the pioneering era

The quick and the dead

Chapter Two - THE CUSTOMERS–BUSINESS MODELS

The long tail–providing the leads

Winning customers–the traditional economy discovers the internet

Winning customers–e–tailers

Subscriptions and micropayments

Freemium

Selling the data

Selling advertising

Customer loyalty

Chapter Three - THE PRODUCT

Market–driving companies: radical innovation

Focusing on the product

Delighting the user

The peril of poor websites

Innovate

Protect your intellectual property

Chapter Four - THE SKILLS

Leadership: but you may have to buy the milk

Recruiting

Motivating and retaining the team

Location, location, location

Outsourcing

Professional advisers and company boards

The sorcerer’s apprentice

Chapter Five - THE CASH

Raising money

Planning

Cash is king

Cash collection

The importance of employee options

Keeping the lid on costs

The exit

Equity

Chapter Six - MARKETING

A mongoose speaks

The viral effect and public relations

Your online reputation

Search engine optimization (SEO)

Pay–per–click

The affiliate model

Using social networks

Email marketing

Anyone want a pixel?

Chapter Seven - THE REST OF THE WORLD

At worst folly

Europe is not America

Japan

China

Chapter Eight - THE FUTURE

The pace of change

Connecting the world

Infrastructure

Privacy

Traditional media

The struggle to maintain copyright

Netopoly

Convergence: computers, phones, notebooks and iPads–internet to go, please

The global internet

The advertising dollars will continue to pour in

Afterword

NOTES

SELECTED BIBLIOGRAPHY

INDEX

Further praise forNet Profit

“A readable, up-to-date and highly practical guide to running a successful e-business.”

John Quelch–Lincoln Filene Professor of BusinessAdministration, Harvard Business School

“Soskin is something of a Godfather to Britain’s digital economy. So Net Profit is an essential read for anyone looking to start or improve their internet offerings.”

Ian Wallis–Editor,Growing Business Magazine

“Real words of wisdom from someone who can explain both ‘the forest’ and ‘the trees’ based on experience. Net Profit offers priceless advice not just for digital entrepreneurs but also for any executive or professional with an interest in the digital economy.”

Dan Bricklin–Co-creator of VisiCalc, the pioneering electronic spreadsheet, and author ofBricklin on Technology

“Really practical advice from someone who has been there and done it! Soskin’s deep experience of what works and what doesn’t work for internet businesses shines through on every page. A fascinating read with hugely valuable insights for e-entrepreneurs.”

Adrian Beecroft–Founder, former Chief Investment Officer and Senior Managing Partner, Apax Partners

This edition first published 2010

Copyright © 2010 David Soskin

Registered office

John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com.

The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books.

Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought.

Library of Congress Cataloging-in-Publication Data

Soskin, David, 1954-N

et profit : the secrets of success in digital business / David Soskin. p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-66081-2 (pbk.)

1. Electronic commerce. 2. Success in business. I. Title.

HF5548.32.S644 2010

658.8’72—dc22

2010021965

A catalogue record for this book is available from the British Library.

Typeset in 11/16pt Janson MT by Toppan Best-set Premedia Limited, Hong Kong

For Alexandra

ACKNOWLEDGEMENTS

First, I would like to thank Ellen Hallsworth of John Wiley & Sons whose idea this book was and who gave me the green light. She has been patient with me at every stage and her rigorous editing has helped transform an internet entrepreneur’s thoughts into a book.

John Hatt and Hugo Burge kindly took the time to read an early draft. I am deeply grateful to them for their sage advice.

This book would not have been possible without the expertise of many colleagues past and present including John Barrington-Carver, Milenko Beslic, Ceri Davies, Shahin Fard, Brian Fitzgerald, Tom Impallomeni, Suzanne Lilley, Christian Lindstrom, Kam Rai and Jonny Steel. They are all stars of the digital firmament.

Dan Bricklin and Nicholas Negroponte were my muses. They were the earliest of ‘early adopters’ and they were among the very first to predict the digital revolution. I appreciate their wise counsel.

Jonathan Cornthwaite, a partner of Wedlake Bell, took the time not only to read and critique my early drafts but also to advise me on the complex issue of intellectual property, a subject in which he is a leading expert. I could not have had a better guide. Angela Mansi of WorkLife Management likewise gave me some valuable comments on my ‘People’ chapter.

The life of an entrepreneur can often feel lonely; so talking to other entrepreneurs can be both reassuring and encouraging as many issues are common across different businesses. One entrepreneur in particular whom I would like to thank is the enormously talented Victor van Amerongen, who has been a great friend since my Oxford days and whose comments about this book have been very helpful.

I must thank the CEOs and founders of the companies in which Howzat Media has invested. I have watched with admiration as they have expanded their respective companies and they are a great group: in the UK, Peter Ward and Jerome Touze of WAYN and Sokratis Papafloratos of TrustedPlaces; in Germany, Rolf Schrömgens, Peter Vinnemeier and Malte Siewert of Trivago; and, in the USA, Chris Hill of CheapToday and Richard Price of Academia.

I would also like to thank the internet CEOs and founders who have given me their valuable time, especially Hugh Chappell of TrustedReviews and Richard Moross of Moo.

Linda Pilkington, founder of Ormonde Jayne, gave me a useful insight into how her website has helped successfully grow her perfumery enterprise, and I am grateful to her for this.

I must mention two members of my media team at ABN AMRO, Harjinder Singh-Heer and Raiko Mancini. We worked closely together exploring the dynamics of a then nascent digital industry. We learned much together.

My own circle of friends and family includes some avid readers who have helpfully shared with me over the years their views as to what makes for a ‘good read’, especially Simon Clark, Keith Gregory, David Roodyn and Shirley Soskin.

My excellent editor at Growing Business Magazine, James Hurley, has been rightly demanding with his deadlines but always resolute in his support. James got me writing again after a long absence.

Susan and Han Alloun, Ross McInnes and Jerome Bourreau were all immensely generous with their hospitality, allowing me to stay at their fine houses in France while I constructed the shape of the manuscript.

I have talked to a lot of people in the vibrant and growing London internet community while writing this book–too many to list here but I do thank you all.

Most importantly of all, I am indebted to my wife Alexandra to whom this book is dedicated. Alexandra read all my drafts and her comments, critique and support were invaluable. My love and gratitude, as ever.

David Soskin London, 2010

PREFACE

Back in 1994, I returned to the campus of Harvard Business School to attend my 15th reunion weekend. These reunions are held every five years. They act as networking events designed both to keep graduates in touch with each other and for Harvard Business School to ensure that its fundraising activities enable it to remain as one of the best-endowed academic institutions in the history of mankind. Part social, part study, the reunions are always well attended.

The welcome party, held on the sun-dappled lawns outside the school’s imposing Baker Library, was the first opportunity to greet my classmates, many of whom I had not seen in the 15 years since graduation. I immediately spotted Dan Bricklin. Though he no longer sported a pony tail, he was still dressed in the same uniform of faded jeans and a tee shirt that he had worn throughout his two years of classes.

Twelve years earlier, and just three years after graduating from the Harvard Business School, Dan had been named by Time magazine as runner-up for their Man of the Year Award. His financial spreadsheet Visicalc was certainly one of the most important software inventions in history. Not only did it turbo-charge the growth of the personal computer, it revolutionized the ability of business everywhere to plan and to model.

Dan was asked to moderate a panel discussion at this reunion. The subject was ‘Cruising the Information Superhighway’. The other panel on offer was ‘Buyouts and Industry Restructuring’. For me, this was like the movie Sliding Doors, the plot of which revolves around the slightest happenstance providing a life-changing moment. Maybe if I had opted for the other panel discussion, my career would have been very different. And I would almost certainly not be writing this book.

Happily (for me), as Dan was a friend and I was fascinated by the Visicalc story, I decided to opt for his session, albeit with some trepidation. I imagined that the complexity of its content (brainy Dan had inevitably done his Bachelor’s degree in Electrical Engineering and Computer Science at MIT, the Massachusetts Institute of Technology) would prove too much for my liberal arts-trained mind.

So it was that at 9.20am on Saturday 4 June 1994, I joined the audience in the austere, windowless surroundings of Aldrich Room 109. I do not recall what the other panellists said. But I do recall Dan’s dazzling performance. He gazed into a future where digital technology would revolutionize the world. He argued in the plainest of terms that we were going to see it transform society.

He talked of course about the ‘Information Superhighway’ (the original name for the internet) and gave example after example of what the future would look like. He described how a motoring accident would be attended by paramedics able to receive expert guidance from a top surgeon supervising their work, in real time, aided by screen images sent via a digital camera. He talked too about something called an ‘internet browser’. He explained this was a device enabling anyone to find what they wanted on the World Wide Web quickly and easily. It was called ‘Mosaic’ and had been developed over the previous couple of years by Marc Andreessen.

Many business careers move ahead in a straight line: you get a promotion; you manage more people; you are allocated a bigger budget. But there are few ‘light bulb’ moments. For me, after listening to one of America’s most celebrated technology stars spell out his vision of the future, in the very place where, 15 years earlier, I had completed my MBA, life would never be the same again. The light bulb was switched on and burning brightly.

I was determined then to understand this digital revolution better and to see if there was within it a business opportunity for me. What excited me more than anything was the prediction that it could change forever the way we consume media. For I had been fascinated by the media from a very young age.

To take the story back a bit, some of my earliest childhood memories are of my regular weekly visits to the Observer newspaper, the oldest Sunday newspaper in the world (founded in 1791). It was then headquartered in a vast block which it shared with The Times in Blackfriars near to the River Thames. My aunt was the Observer ’s political correspondent and, on Saturdays, she used regularly to invite me to see the paper being ‘put to bed’. The print room, the rolling presses, the photographic ‘dark rooms’, the erudite conversation among the paper’s journalists, all carried out under the direction of the charismatic editor and proprietor David Astor, gave me a taste for media which I never lost.

Years later, on going to Oxford University, I immediately joined the staff of The Cherwell, the student newspaper. There I progressed from advertising sales manager (this, in the main, required visiting Chinese restaurants and not leaving without a cheque for the advertisements they had been placing all term–an early lesson in income recognition and cash management) to general manager and then to director of Oxford Student Publications Limited, the parent company of The Cherwell, on which board I sat for nearly three years.

After Oxford, and my Harvard MBA, my career was diverse, often hovering around the edges of the media industry. I worked for Redland, an international construction products company, and was involved in a consortium which applied for local and national TV franchises–I was unable to rid myself of the media bug.

In the 1990s, I worked as a policy adviser to Prime Minister John Major in Number 10 Downing Street. Whilst there, scribbling policy papers, I often thought about Dan Bricklin and his predictions. Then a friend, a TV producer, gave me a book which he said was a ‘must read’. Called Being Digital, its author was the founder of the Media Laboratory at MIT, Nicholas Negroponte. Like Dan, he too predicted the future. In the intervening decade and a half since the book was published, much of what he foresaw has actually happened.

To take just one example: Negroponte predicted in the book that paper would be replaced by screens and that books as we know them would be superseded by electronic reading tablets. Fast forward to 2010 when Kindles, Sony E-readers, iPads and other electronic book devices are already being sold the world over by the truckload. As I read the book, I thought of my own experience in the TV world and of that newspaper print room of my childhood. The world was about to change and I wanted to be part of that change. By early 2000 I had achieved my goal. I found myself at Cheapflights sitting in a tiny room in Wandsworth, South London, above Foxtons the estate agents. We had just £20,000 in the bank, and the team was small–just three of us.

Just a few weeks before, I had been running ABN AMRO’s global media team. At that time, ABN AMRO had over 100,000 employees, with 12,000 in the investment banking division alone. The London office where I worked was a vast green plate-glass edifice shaped, rather appropriately, like a slice of Dutch Gouda cheese. It was three years since I had joined ABN AMRO, and I was yearning to get into the digital economy.

But none of the many new digital ventures at which I had been looking appealed to me. They all seemed to have fatal flaws: inexperienced, weak management (not that there were many experienced digital executives in the late 1990s) and too many young people with lots of energy and creative input but little or no idea about either business or the sectors which they planned to conquer. Worse, the plans called for huge amounts of cash. $100m was a common number. Why $100m? I do not know. It was a nice fat, round number. That was about it.

To compound the problems, none of these companies seemed to be able to make money any time soon–the common model was emerging as one of years of losses before arriving at the eventual promised land of profits.

By late 1999, I was feeling a bit despondent about finding the right internet opportunity.

And that’s when I received a telephone call from an old friend. ‘David ’, he said. ‘Look, I can’t really talk. I am at a funeral and they are just about to bury the deceased. But there is someone here I have been chatting to. He is called John Hatt. He owns a company called Cheapflights and he wants to sell it.’

From the graveside to the birth of a new career.

Well, you need a bit of luck in this world.

ABOUT THE AUTHOR

David Soskin is a seasoned internet entrepreneur and business commentator.

Currently Chairman of mySupermarket.co.uk and of Swapit.co.uk, David was, for eight years, CEO of Cheapflights Media and remains on its board of directors. In that time he grew the groundbreaking company from an attic-based operation into an award-winning international leader in online travel search with tens of millions of users worldwide.

David is also co-founder of Howzat Media LLP, which invests in early-stage digital media companies on both sides of the Atlantic.

He is a regular speaker on the subject of internet business and writes a monthly column in Growing Business Magazine.

Prior to Cheapflights, David held senior roles in industry, banking and government.

He was educated at Oxford University and the Harvard Business School. David is married and lives in London.

INTRODUCTION

You may have shied away from starting an internet business because you fear that you do not have the technology skills; or that you need a lot of money to get started; or that internet businesses are by definition loss-making; or that you are simply too old. Shed your misgivings. I will show in this book that this is not only an excellent time to start an internet business, it is also much more possible than perhaps you might think.

I have written the book around eight key themes:

• The commercial internet’s early years and what can be learned from them

• The central role of the customer even in the digital world and how different types of revenue models continue to multiply

• The importance of building a great team

• The product and how crucial it is to get the website right

• Raising money, prudent financial management and exits

• Driving traffic

• The global potential offered to businesses by the massive expansion of the internet

• The future

Some of what I say may seem blindingly obvious. I anticipate that some sophisticates of the blogosphere might take issue, for instance, with anyone writing in 2010 about the need to get the website right.

But I know from personal experience just how many really bad websites remain–and that has nothing to do with cash. I have seen small business websites with better design, look and feel and functionality than some of those owned by major companies.

I have written this book primarily for entrepreneurs either running internet businesses, or considering doing so, and wanting those businesses to be profitable. I hope that it will be useful too for all those in the digital economy who seek a broader understanding of some of the areas with which they may not be familiar. You may be expert at optimizing your website for search engines but not fully comprehend the importance of cash conservation. You may be a virtuoso at selling online advertising but not grasp fully the necessity of good web design. You may be a business whizz in your own domestic market but not have experienced the pitfalls of building a cross-border business. So I hope this book will be useful if you wish to broaden your skill base as you build your career in the digital economy.

It is a good time to start up, to work and to invest in the digital economy. Unlike so many economic activities, digital business continued to grow throughout the 2007-2009 credit crunch. Internet technology allowed hard-pressed consumers to compare prices and save money. It continued to provide a major catalyst to the way people conduct business in the old economy. In this book I show some examples ranging from a luxury one-shop perfumier in Mayfair who uses the internet to tap the global market to the mighty supermarket company Tesco with its vast online investment.

Retailing, search, price comparison, consumer reviews, music and video are just some of the areas which have been transformed by the digital economy in just 15 years.

The digital revolution is engulfing the world’s population. The internet is here to stay. The top four internet companies (all American) have a market value of $300bn. New companies are becoming global operations at breakneck speed. Twitter, Facebook, Spotify and many others have been launched in this new century and are already used by hundreds of millions. It is now a cliché that if Facebook was a country it would be one of the world’s largest.

For the younger generation in particular the internet is the first port of call for a range of activities including research and shopping. They are the first ‘digital natives’ whose knowledge was recently proven when a 15-year-old intern at the investment bank Morgan Stanley wrote a research note on internet usage that became one of the most widely-circulated research papers in its history.

So this is good news for anyone considering launching an internet business. It is not too late. Quite the opposite in fact for the internet is still in its infancy. The market is growing. Young people, the consumers of the future, are by definition practically all internet users. The opportunities are vast.

And the great internet ideas have, in the main, come from individuals not huge companies. Even the legions employed by media über-mogul Rupert Murdoch have not so far come up with a single world-beating internet idea. Murdoch resorted to buying MySpace and the jury is still out on just how successful that purchase really was. Amazon was invented by Jeff Bezos: it did not derive from bookseller giants like Barnes & Noble or Borders. CraigsList.com, which has singlehandedly swung a wrecking-ball through the classified advertising revenues of the great traditional media juggernauts, was the brainchild of San Francisco-based Craig Newmark.

In this book, I cite examples from the first 15 or so years of the internet’s commercial life. These examples are to illustrate some of the do’s and don’t’s of the internet business and to draw more clearly practical lessons from the experience of others. There is, however, nothing more compelling than first-hand experience. You will notice very soon that I talk a lot about Cheapflights. I trust that you will excuse me for doing so. Cheapflights is the internet company that I came across in late 1999, I ran for eight years and on whose board I still sit. So I know the company and the experience of building it intimately. It provides some good lessons for any entrepreneur anywhere in the world seeking to start and grow a successful digital business.

Just like the Cheapflights website, the book is intended to be accessible to all, not just the ‘digerati’. The purpose of the book is to share some of basic rules of running a successful digital media company. Much of it is plain common business sense: the advent of the World Wide Web does not mean that traditional methodology has suddenly died.

I hope the book will become a basic primer for the digital media industry and that it will destroy many of the canards that have become so prevalent. For example, to succeed, you do not (necessarily) need:

• Millions of pounds of investment;

• A computer science degree from MIT;

• A Silicon Valley HQ ;

• To be 22 years old;

• Ever to lose money;

• To spend a fortune on advertising.

You do need a great idea, super people, a sound business plan, energy and tenacity.

Chapter One

THE DIGITAL REVOLUTION–A SHORT HISTORY

‘Lo’ (the first word ever to be transmitted on the ARPANet, precursor to the internet, 29 October 1969)

I’ve written this book to help you build a successful digital business. First, though, it is important to understand why and how this revolution happened in order better to grasp today’s business opportunities.

The forefathers of the internet saw a time when the entire world would be linked up. Is it surprising then that some of today’s largest internet businesses such as Facebook have built themselves on this aspiration? Because the internet is an inherently global medium, it has enabled the sort of explosive growth that has witnessed companies like Amazon, Yahoo, eBay and Google go from nothing to major international players within the space of less than two decades. At no time in the history of business have there ever been global businesses created quite so quickly.

By understanding the milestones that led to the commercial internet –and the progress of the World Wide Web since that time–entrepreneurs can appreciate more keenly that the pace of change has been relentless and it is speeding up, not slowing down. Each change leads to more and more opportunities for the agile and imaginative entrepreneur.

This chapter looks at the formative years of the internet, the huge hopes that accompanied the early pioneers and the dramatic crash that followed. For those in the digital economy, or planning to join it, there are lessons to be learned from those early failures and of course from those companies that survived the meltdown to thrive and prosper.

Origins of the internet

There was no Eureka moment for the internet.

So how had the technology evolved? Over the three decades from the 1960s, the internet emerged out of an alphabet soup, as ARPANet was followed by CSNET and finally NSFNET.

First ARPANet. In 1957 the USA was in a state of collective shock. The Russians had launched their first satellite, the Sputnik, into space. President Eisenhower was determined that it would be the USA and not the USSR that would lead the world in technology. So he created ARPA–the United States Department of Defense Advanced Research Projects Agency–to fund research into advanced technology. Among ARPA’s areas of focus was computer research.

An early key figure at ARPA was MIT Professor Joseph Carl Robnett ‘Lick’ Licklider. Licklider foresaw a time when everyone on the globe would be interconnected. Anyone could access information at any computer from anywhere. With a good interface and strong computing capability, ideas and performance would flourish. This was the conception of today’s internet. It would take another three and a half decades before Licklider’s vision became a reality and the internet would indeed become a global phenomenon.

ARPA regarded the need to link up the recipients of its research dollars as a priority. All over the USA, ARPA was funding centres of excellence: UCLA had simulation; the University of Utah, graphics; the University of Illinois, high performance computers. How could all these brilliant researchers communicate with each other and exchange ideas?

The key to the construction of a network was packet switching technology whereby relatively small units of data (‘packets’) could be routed between computers through a network based on the destination address contained within each packet. Breaking communication down into packets allowed the same data path to be shared by many users in the network. Packet switching is, of course, the basic technology behind the internet.

On 29 October 1969, ARPANet was established in California between UCLA and the Stanford Research Institute. The first message which was meant to be transmitted was ‘login’ but the system crashed midstream, so only ‘lo’ was received; a more biblical than technical debut.

The launch of ARPANet did not attract the publicity that accompanied Neil Armstrong’s first steps on the moon only three months before; but, for mankind, it may have been an even greater leap.

In the 1970s, the use of computers became more and more widespread, propelled by ‘Moore’s Law’. Coined by Intel co-founder Gordon Moore in 1965, it states that the number of transistors on a chip doubles every 24 months.

We have seen how, in 1969, ARPANet led the way in networking computers. But access to it was not universal, being confined to government and academic researchers.

In 1981, the National Science Foundation (NSF)–an American federally-funded agency which supports non-medical research and education in science and engineering–started its own network called the ‘Computer Science Network’ or CSNET. This system connected to the ARPANet and provided internet services, including email. It was also international, linking the USA to many countries in Europe and Asia. This widened the user base considerably. But it was not, as yet, the mass application that we know today.1

Two years later, in 1983, there was another important advance. Paul Mockapetris invented the Domain Name System, more commonly known as ‘.com’, ‘.co.uk’, ‘.org’, and other popular suffixes. 2 The Domain Name System is the ‘phone book’ for the internet which translates human-friendly computer hostnames into Internet Protocol (IP) addresses. For example, www.example.com translates to 208.77.188.166.

In 1985, the NSF began funding the creation of five new supercomputer centres. The National Science Foundation Network or NSFNET connected these five centres and allowed access to their supercomputers over the network at no cost. From then until the advent of a commercialized internet 10 years later, the NSFNET was the principal internet backbone (CSNET was eventually phased out).3

The World Wide Web

Now the story moves to Europe, specifically to the Franco-Swiss border near Geneva and the European Organization for Nuclear Research, better known by its French acronym CERN.

It was here that an Englishman and Oxford physics graduate, Tim Berners-Lee (now Sir Tim), invented the World Wide Web (www). This development was, of course, critical to the commercialization of the internet. It was to the internet a development of the same magnitude as Gutenberg’s printing press was to the publishing industry. It is a system of interlinked ‘hypertext’ documents accessed via the internet. Hypertext (which had been invented all the way back in 1965) is text displayed on a computer with references (hyperlinks) to other text that the reader can immediately access, usually by clicking. Apart from running text, hypertext may contain tables, images and other presentational devices. Berners-Lee’s breakthrough was the hyperlink which allowed users to ‘link’ from one document to the next.

The first website, ‘Info.cern.ch’, went online on 6 August 1991. Its address was http://info.cern.ch/hypertext/WWW/TheProject.html and it described the WWW project. 4

There is an interesting postscript to the invention of the World Wide Web. For even as distinguished a scientist as Berners-Lee could make mistakes. In 2009, he admitted that the infuriating double forward slashes that precede every website address were unnecessary.‘Really, if you think about it, it doesn’t need the //’, he told a symposium. ‘I could have designed it not to have the //.’ 5

For around 20 years, the internet had been largely the preserve of scientists, academics, researchers and computer geeks of all sorts. Thanks to Berners-Lee’s invention of the World Wide Web in 1991, it was now open house. The number of internet users jumped from 600,000 to 50 million in just four years.

The other key driver of the early internet was the improving ‘web browsers’ which Dan Bricklin had described in his June 1994 Harvard talk. These built on Berners-Lee’s WWW invention. Better web browsers meant more easily retrieving and navigating information on the World Wide Web. Celebrated though it is, the Mosaic browser was predated by many others (such as Cello and ViolaWWW), now sadly forgotten by most people. What made Mosaic so different was that it was more user-friendly than its predecessors.

The development of the internet in the 1960s and the subsequent invention both of the World Wide Web and of improving browsers in the 1990s contributed to a true communications revolution.

Of course, communications revolutions do happen–but not all that often. According to one scholar of ancient civilizations, Lord Sachs, the Chief Rabbi of the United Kingdom, there have been four watersheds in people’s ability to communicate with one another.

The first was the invention of writing in ancient Mesopotamia; the second was the invention of the alphabet; the third was the development of the ‘codex’, the book as a set of bound pages rather than a scroll; the fourth was, of course, the invention of printing in the mid-fifteenth century.6

And now, in our own time, we have the fifth revolution, the internet, which at the time of writing is used by 1.7 billion users. Put simply, this means that one in every four humans in the world is an internet user. 7

No new technology has ever been adopted so quickly. It took four years to attract the first 50 million internet users compared with 38 years for radio, 16 years for the personal computer and 13 years for television. 8

The business of the internet begins

The National Science Foundation Network (NSFNET) had until 1993 an ‘Acceptable Use Policy’ prohibiting commercial use of the internet. Now the policy was dropped. The internet had, for the first time, moved from ‘not for profit’ into the world of free market capitalism.

Taking advantage of this liberalization, Tim O’Reilly, the founder and CEO of O’Reilly Media and one of the USA’s foremost commentators on technology, launched Global Network Navigator (GNN), an ‘Internet-based Information Center’, in August 1993. O’Reilly argues that GNN was the first commercial website, the first to introduce the portal concept, and the first use of internet advertising as a business model. 9

This was a moment comparable to the birth of the modern oil industry. Oil had been around for a long time (millions of years in fact); but its monetary value was limited because its commercial applications were few. Then, in the nineteenth century, it became a staple for lighting and heating and, of course, for the combustion engine. Fortunes were made. At the beginning of the twentieth century, Standard Oil of New Jersey was so large that the US government broke it up. Nevertheless its offshoot Exxon became one of the world’s largest corporations as did its rivals BP and Shell.

Similarly, the internet had been around for a while as a communication tool. Then, suddenly, the internet was not just a place for communication but a place where money could be made. And internet advertising became to the end of the twentieth century just what oil was to the end of the nineteenth century. The same excitement, the same hype, the same triumphs, the same disasters and some similar ‘new industry’ dynamics played out–like the early combustion engine and the far-reaching implications of motorized road transport.

Early entrants

Many of today’s biggest internet success stories date from the earliest days of the internet’s post-1993 commercialization (Amazon and Yahoo were founded in 1994, eBay in 1995 and Google in 1998). I will look at the lessons these teach us about building successful businesses. But it is also useful to look at the early failures and the reasons for their demise.

It is quite true that many of the early players that once promised so much fell apart. Who today remembers Alta Vista (founded 1995), once one of the world’s leading search engines; Webvan (founded 1996), which promised to bring groceries ordered online to the door of every PC user; or Value America (also founded in 1996), which promised ‘convergence commerce’, the opportunity for American shoppers to buy online directly from manufacturers?

Why did they all fail? Each was for a different reason, but their respective collapses serve as clear warnings to anyone wanting to start or grow an internet business.

The search engine Alta Vista (which means ‘a view from above’) was one of the most popular websites in America. Its failure stemmed from an unwise diversification. It decided that it wanted to be a portal as well, competing head-on in unfamiliar territory, with Yahoo and others. In so doing, Alta Vista strayed from its core competence (search). Not only did Alta Vista fail to compete successfully as a portal, but as management focused on this, they took their eye off the search ball. This allowed the search industry’s new kid on the block Google (which launched in 1998, a full three years after Alta Vista) to beat them at their core competence. Alta Vista was finally acquired in February 2003 by Overture Inc. for a knockdown price of $140m, compared to its valuation of $2.3bn three years previously.

Another exemplary failure was Webvan, an online grocery shop, which flew too close to the sun before reality caught up with it. Founded by the bookshop entrepreneur Louis Borders, it had ambitious plans to roll out across the whole of the USA. It recruited ex-Andersen Consulting CEO George Shaheen as CEO and, in 1999, things looked peachy. After a successful Initial Public Offering (IPO), its market value reached almost $6bn.

Innocent days. And it is quite understandable that, in those days of internet infancy, observers were all so focused on the dreams that they overlooked the obvious shortcomings of the business plan. Webvan had several fairly clear weaknesses. No one spotted or cared very much that the founder was not in fact a grocery guy. Nor that its sales (just a few million dollars) were miniscule. Nor that it was untested beyond precisely one city (San Francisco). Nor that its CEO was a management consultant. With a $6bn valuation, who wanted to be a party pooper?

In 2001, just a year and a half after its remarkably successful IPO, Webvan closed all its operations and filed for Chapter 11 bankruptcy protection. It had been far too optimistic about people’s willingness to give up their traditional ways of shopping in favour of something new and different. It had overinvested in something that was quite untested.

As the magazine Wired pointed out rather sourly:

This type of extreme optimism was pervasive in late 1999, when Webvan went public.10

As for Value America, its IPO in April 1999 was also a huge success. It raised $115m with an offering price of $23. On the first day of trading, its shares opened at $63 and closed at $55, valuing the three-year-old, profitless, company at a heady $2.4bn.

In that same year, the respected Forrester Research Inc. ranked Value America fourth in its league of general merchandise e-commerce sites, behind Amazon.com, Wal-Mart and QVC. Forrester noted in October that the company’s‘low prices compensated for numerous site design probles’! 11

Value America’s founder, theinappropriately named Craig Winn, could certainly talk the talk. A local business magazine took up the story:

‘You’ve got to hear the sermon. Craig Winn is a little like an evangelist. After you hear him talk, you almost want to give him money’, says Alfred C. Weaver, a computer science professor at the University of Virginia.

Some have done just that. Co-founder Rex Scatena, an environmental lawyer, provided start-up funding and now serves as Vice Chairman and General Counsel. Ken Power, Value America’s creative director, says that within the company, they have a name for this intoxication: ‘drinking the Kool-Aid.’ He’s among the imbibers.12

Apparently Winn drank so much of his own Kool Aid that he seriously considered having a crack at the Presidency of the United States.

But behind the scenes chaos reigned as described in a side-splitting (unless of course you had been an investor) account of the company’s rapid fall in Dot.Bomb by J. David Kuo, who worked for Value America. The information systems were never properly built; shipments and deliveries were a disaster; shareholders’ money was lavished on private jets; and an elaborate office ‘campus’ was built in Virginia.

In the end, it was not the White House that beckoned Winn but rather an ignominious retreat to Chapter 11 of the Bankruptcy Code.

What is interesting about these three collapses was that in each case there was a fundamental problem which investors were simply too inexperienced and overexcited to spot.

Alta Vista made the fatal error of straying from its core mission of search into territory better understood by others advertising-based portals), allowing upstart Google to develop a world-beating search product that destroyed Alta Vista’s ability to compete–an early lesson of the breakneck speed at which internet commerce operates.

Webvan hastily invested its shareholders’ money in a vast infrastructure that was completely unsuited for the modest demand for its product.13 It overexpanded. At that time, there was low internet penetration and limited experience of online shopping. Consumers do not change their grocery buying habits overnight.

Ten years on it is the UK that is now the most advanced online grocery shopping market in the world (where probably well in excess of $2bn has been invested by companies such as Tesco, ASDA and Ocado). Yet still fewer than 3% of overall British grocery sales are online14and that is in a country that enjoys 80% internet access.

The subsequent British experience shows that actually Webvan was not a bad idea–just a company whose idea was perhaps 20 years ahead of its time.

Value America talked the talk but failed to walk the walk. Like Craig Winn, Amazon CEO Jeff Bezos is a great salesman; but anyone who uses Amazon knows that much of its success is in the detail of execution–from the design of its website and the packaging of its goods, to its highly sophisticated customer relationship management. In stark contrast, it seems that Value America’s operations management bordered on the farcical.

Surviving the ‘dot.com crash’

The internet revolution has only just started. The commercial internet is barely 15 years old. We are only just beginning to comprehend its power as a communications tool and its capacity to underpin successful business models.

Yet already the industry has been written off once during a difficult period called, rather prematurely, ‘the dot.com collapse’. In 2000-2002, following a wave of business failures, many pundits were suggesting that the whole thing was just a flash in the pan, just like Tulipmania (a grotesque speculation in the price of tulips in seventeenth-century Netherlands) and the South Sea Bubble (a wild speculation on the shares of the South Sea Company in eighteenth-century Britain based on a fallacious belief in the exponential growth of trade with the New World).

In reality, however, this was nothing more sinister than some adolescent problems: overhyped business plans, inexperienced management, limited user access, the slow performance and high cost of internet use (those wretched dial-up charges!)–and, of course, the bubble element, a surfeit of investor exuberance. Naysayers and overexuberance often go hand in hand–in the 1890s, many people wrote off the horseless carriage as accident-prone, overhyped, too expensive and doomed to fail.

The so-called dot.com crash wiped out $5tn in the market value of technology companies from March 2000 to October 2002. Opinions differ as to why the fall happened so fast and on such a huge scale: disappointing online retailing results from the 1999 Christmas trading period; Microsoft’s anti-trust hearings; a huge one-off technology spend on the Y2K (the millennium bug) switchover; and enormous, simultaneous sell orders for leading tech stocks such as IBM and Cisco. All have been cited as contributors to the collapse.

In fact, much of the financial disaster related not to dot.coms but to the failure of the big telecoms infrastructure firms such as WorldCom, a company which was riddled with fraud. It overstated its assets by billions of dollars and its CEO Bernie Ebbers was later sentenced to 25 years in prison. Much of that ‘lost cash’ from the pre-bubble era went into the creation of long-haul fibre optic systems and local networks which provide the backbone for today’s internet companies.

It was not just big names that went down in the dot.com ‘collapse’. Hundreds of small companies disappeared. They were out of cash and the funding dried up. The UK had its fair share of disasters. Who remembers now ClickMango, an online health and beauty e-tailer backed by Atlas Ventures and the Rothschild Family Trust and fronted by TV star Joanna Lumley? Or Ready2shop.com, a fashion advice business co-founded in November 1999 by fashion gurus Trinny Woodall and Susannah Constantine? Or Beenz.com which allowed consumers to earn ‘beenz’ (a type of online currency, for performing activities such as visiting a website, shopping online, or logging on) which raised almost $100m from blue-chip investors including Apax, Larry Ellison of Oracle, and Francois Pinault of PPR? Hardly surprising then that the internet industry rapidly became a byword for failure and incompetence.

Many of these businesses were simply launched too early. For in the UK, in the late 1990s, internet access was not universal. In 1999, at the height of the euphoria, internet penetration was 13% (barely one in 10 homes). People at home were spending on average only eight hours a month (480 minutes) online–16 minutes a day! But the most staggering statistic is this: internet advertising in total was barely £50m.

A decade ago technology costs were high, dial-up internet access was the norm (imagine paying by the minute for the time spent online) and many people were simply too frightened to put their credit card details into a computer.