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sites under names such as AutoTrader.com, CycleTrader.com, BoatTrader.com, and
AeroTrader.com. These sites accept paid advertising from individuals and companies



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164 Schneider


that want to sell cars, motorcycles, boats, and airplanes. Trader Publishing charges a fee
for each listing and gives the seller the option of running the ad on the Web site only
or on the Web and in the print version of the advertising newspaper. If the product has
a dedicated following, this type of site can be successful by catering to small audiences.
For example, the VetteFinders site sells classified ads for Corvette automobiles only.
In 2002, another classified advertising category emerged, the dating services and
personal ads sector. This category yielded more than $87 million in sales revenue in 2002
and is expected to continue growing rapidly (Smith, 2003).


Information Providers: Subscription Revenue Models

Some companies that own intellectual property or the rights to such property have begun
using the Internet as an important distribution channel for selling intellectual property
rights as digital products. For example, LexisNexis began as a legal research tool that has
been available as an online product for years. Today, LexisNexis offers a variety of
information services, including legal information, corporate information, government
information, news, and resources for academic libraries (Electronic Information Report,
2001). The original legal information product exists on the Web today as Lexis.com and
provides full-text search of court cases, laws, patent databases, and tax regulations. In
the past, law firms had to subscribe and install expensive dedicated computer systems
to obtain access to this information.
The Web has given LexisNexis customers much more flexibility in how they purchase
information. Through the Lexis.com Web site, law firms can subscribe to several versions
of the service that are customized for different firm sizes and usage patterns. The Web
site even offers a credit card charge option for infrequent users who do not want a
subscription. LexisNexis has used the Web to improve the delivery and variety of its
existing product line and has been able to devise new products that take advantage of
the Web™s features. Chung and Rao (2003) outline a general model for using product
bundling in market segmentation applications such as the LexisNexis example.
ProQuest, a Web site that sells digital copies of published documents, has its roots in
two businesses: the former Bell and Howell learning materials business and University
Microfilms International (UMI). These firms had acquired reproduction rights to a variety
of published and unpublished materials (Hane, 1999). For example, UMI had contracts
with most North American universities to publish all doctoral dissertations and masters
theses on demand. ProQuest offers digital versions of these documents for sale, along
with a number of newspapers, journals, and other specialized academic publications.
Many schools and libraries have subscriptions to ProQuest. Other companies, such as
SilverPlatter Information and EBSCO Information Services sell subscriptions to digital
versions of journals and books to corporate and university libraries. These companies
also sell access to bibliographic databases and electronic journals to individuals,
schools, companies, and libraries.
Dow Jones is a major business publisher that has sold subscriptions to digitized
newspaper, magazine, and journal content for a number of years. The company offered




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Digital Products on the Web 165


a customized digital clipping service that provided subscribers with a daily e-mail
message of news on topics of interest to them (O™Leary, 1998). Dow Jones and Reuters,
a British company, joined in 2002 to create an online content management and integration
service called Factiva. Factiva now provides the same types of services that Dow Jones
had provided, but also gives companies the ability to integrate their existing content
(such as a corporate library) with Dow Jones and Reuters news sources (Conhaim, 2002).
One of the first academic organizations to use Internet distribution was the Association
for Computer Machinery (ACM) with its ACM Digital Library. This Web site offers
subscriptions to electronic versions of ACM journals to its members and to library and
institutional subscribers (White, 2001). Academic publishing has always been a busi-
ness with thin margins because the number of potential subscribers is much smaller than
more mainstream publications. Even the most highly regarded academic journals often
have fewer than 2,000 subscribers. However, the fixed costs of publishing remained very
much the same for all publishers, both large and small. To break even, academic journals
often must charge hundreds or even thousands of dollars for a one-year subscription
(Parks, 2002). Electronic publishing eliminates the high costs of paper, printing, and
delivery, and makes dissemination of research results less expensive and more timely.
As was the case for other technologies, such as VCRs and subscription cable television,
many of the early commercial users of Web technology were dealers in adult-themed
entertainment material. Many of the first profitable sites on the Web were sellers of adult
digital content (Simons, 1996). These sites pioneered the processing of credit card
payment transactions on the Internet and many different digital video technologies that
are now used by all types of businesses on the Web.


Online Games: Subscription and Combination Revenue
Models

Computer and video games have become a huge industry, with revenue now exceeding
that of the film industry. An increasing portion of the industry™s revenue is generated
online. In the past, many sites that offered games relied on advertising revenue. A
growing number of these sites now include subscription and fee-for-play games. Some
sites sell software that gamers must buy and download to play the games, others require
payment of a subscription fee to enter the fee-for-play games area on the site. Microsoft™s
MSN Games, Sony™s Station.com, Electronic Arts™ EA.com, and RealNetworks™ RealOne
Arcade are among the leading game sites that include subscription game services. For
example, Sony™s EverQuest adventure game has drawn more than 400,000 players who
have purchased a $40 software package and pay $10 per month to continue playing the
game (Kushner, 2002). Most of the game sites charge a monthly subscription of between
$5 and $20 for access to all their fee-based, games offerings. The Interactive Digital
Software Association estimates that about 170 million people in the United States alone
are regular game players, a number that is growing about 17 percent each year (McLaughlin,
2001).




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166 Schneider


Concerts and Films: Subscription Revenue Models

As more households obtain broadband access to the Internet, an increasing number of
companies will provide streaming video of concerts and films to paying subscribers. With
a revenue model patterned after cable television companies, firms such as Intertainer and
RealNetworks are selling subscriptions for delivery of video content to computers and
other devices through cable modem and DSL connections.
The main technological limitation these companies face is that each additional customer
who downloads a video stream requires that the provider purchase additional bandwidth
from its ISP. Television broadcasters, on the other hand, need only pay the fixed cost of
a transmitter because the airwaves are free and carry the transmission to an unlimited
number of viewers at no additional cost. In contrast, as the number of an Internet-based
provider™s subscribers increases, the cost of the provider™s Internet connection in-
creases. However, if these Web entertainment companies can charge a high enough
monthly fee, they should be able to cover the additional costs of technology upgrades
and still make a profit.




Revenue Models in Transition
Many companies have gone through transitions in their revenue models for digital
products. As more people use the Web and as their behavior changes, some companies
have altered their revenue models to meet their customers™ needs. This section describes
the revenue model transitions undertaken by five different companies as they gained
experience in the online world and as they faced the changes that occurred in that world.
These and other companies might well face the need to make further adjustments to their
revenue models in the future.


Transition: Subscription to Advertising

Microsoft created an online magazine, Slate, to provide news and current events
information. Slate included experienced writers and editors on its staff and industry
observers expected the magazine to be a success. Microsoft felt that the magazine had
a high value, too. At a time when most online magazines were using an advertising-
supported revenue model, Slate charged an annual subscription fee after a limited free
introductory period.
Although Slate drew a wide readership and received acclaim for its quality reporting and
writing, it was unable to draw a sufficient number of paid subscribers. At its peak, Slate
had about 27,000 subscribers generating annual revenue of $500,000, which was far less
than the cost of creating the content and maintaining the Web site (Sanderfoot and
Jenkins, 2001).




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Digital Products on the Web 167


Slate is now operated as an advertising-supported site. Because it is a part of Microsoft,
Slate does not report detailed profit numbers, but the magazine announced that it was
profitable as of April 2003 on revenues of $7 million (Carr, 2003). Microsoft maintains the
Slate site as part of its MSN portal, so it is likely that Slate increases the stickiness of the
portal, which is an additional benefit to Microsoft not reflected in the accounting
determination of unit profits for Slate.


Transition: Pure Advertising to Combination Revenue

Another online magazine, Salon.com, that has also received acclaim for its content, has
moved its revenue model in a direction opposite to that of Slate. After operating for
several years as an advertising-supported site, Salon.com now offers an optional
subscription version of its site. The subscription offering was motivated by the
company™s inability to raise the additional money from investors that it needed to
continue operations (Sanderfoot and Jenkins, 2001).
Subscribers pay $30 per year for access rights to a version of the magazine called Salon
Premium that is free of advertising and that can be downloaded for storage and later
offline reading on the subscriber™s computer. Premium subscribers also gain access to
additional content such as downloadable music, e-books, and audio books.


Transition: Advertising to Fee-for-Services

Xdrive Technologies opened its original advertising-supported Web site in 1999. Xdrive
offered free disk storage space online to users. The users would see advertising on each
page and had to provide personal information that would allow Xdrive to send targeted
e-mail advertising to them. Its offering was very attractive to Web users who had begun
to accumulate large files, such as MP3 music files, and who wanted to access those files
from several computers in different locations (Schwarz, 2001).
After two years of offering free disk storage space, Xdrive found that it was unable to
pay the costs of providing the service with the advertising revenue it had been able to
generate. It switched to a subscription-supported model and began selling the service
to business users as well as individuals. The amount of the monthly subscription is based
on the amount of disk space reserved for the user and on the number of people who have
access to the disk space (Schuchart, 2003).


Transition: Advertising to Subscription

Northern Light was founded in 1995 as a search engine with a twist. In addition to
searching the Web, it searched its own database of journal articles and other publications
to which it had acquired reproduction rights. When a user ran a search, Northern Light
would return a results page that included links to Web sites and to abstracts of the items




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168 Schneider


in its own database. Users could then follow the links to Web sites, which were free, or
could purchase access to the database items (Kalin, 1997).
Thus, Northern Light™s revenue model was a combination of the advertising-supported
model used by most other Web search engines plus a fee-based information access
service similar to the subscription services offered by ProQuest and EBSCO mentioned
earlier in this chapter. The difference in the Northern Light model was that users could
pay for just one or two articles (the cost was typically between one and five dollars per
article) instead of paying a large amount of money for unlimited access to its database
on an annual subscription basis. Northern Light did also offer subscription access to
most of its database to companies, schools, and libraries, however.
In January 2002, Northern Light decided that the advertising revenue it was earning from
the ads it sold on search results pages was insufficient to justify continuing to offer that
service. It stopped offering public access to its search engine and converted to a new
revenue model that is primarily subscription-supported (Kontzer, 2002).


Multiple Transitions

Encyclopedia Britannica is a company that transferred its existing reputation for high
quality to the Web (Schneider, 2004). The Encyclopedia Britannica has developed a very
respected brand name in research and education over its many years in print publishing.
Britannica began in the late 1700s when a group of academics collected notes they had
made while conducting research and decided to publish them as a series of articles. After
more than 200 years of successful print publications, Britannica moved to electronic
distribution with a CD offering in the mid-1990s (Ferris, 1996).
About the same time, Britannica launched its online presence with two Web offerings.
The Britannica Internet Guide was a free Web navigation aid that classified and rated
information-laden Web sites. It featured reviews written by Britannica editors who also
selected and indexed the sites. The company™s other Web site, Encyclopedia Britannica
Online, was available for a subscription fee or as part of its Encyclopedia Britannica CD
package. Britannica used the free site to attract users to the paid subscription site
(Conhaim, 2001).
In 1999, disappointed by low subscription sales, Britannica converted to a free, adver-
tiser-supported site (Schneider, 2004). The first day the new site, Britannica.com, became
available at no cost to the public, it had over 15 million visitors, forcing Britannica to shut
down for two weeks to upgrade its servers (Book Publishing Report, 1999). The
Britannica.com site offered the full content of the print edition in searchable form, plus
access to the Merriam-Webster™s Collegiate Dictionary and the Britannica Book of the
Year. One of the most successful aspects of the site was the way it integrated the
Britannica Internet Guide Web-rating service with its print content. The Britannica Store
sold the CD version of the encyclopedia along with other educational and scientific
products to help generate revenue.
After two years of trying to generate a profit using advertising to generate revenue,
Britannica succumbed to its insufficient advertising revenues (Schneider, 2004). In 2001,
Britannica returned to a combination model in which it offered free summaries of


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Digital Products on the Web 169


encyclopedia articles and access to the Merriam-Webster™s Collegiate Dictionary on the
Web, but placed the full text of the encyclopedia in a restricted part of their Web site.
Full text access was available for a subscription fee of $50 per year or $5 per month
(DiSabatino, 2001).
Schneider (2004) notes that Britannica has undergone four major revenue model transi-
tions, from being a print publisher to a seller of information on the Web to an advertising
revenue-supported Web site to a combination advertising subscription model, in just a
few short years. The main thing that Britannica sells is its reputation and the expertise
of its editors, contributors, and advisors. Britannica has decided that the best way to
capitalize on that reputation and expertise is through a combined format of subscriptions
and advertising support.




The Future of Digital Product Sales:
Web Services
A key element in the delivery of digital products is the ability to communicate and send
products across organizational boundaries: from one company to another, or from a
company to an individual consumer. Web services hold the hope of providing this
capability in the near future (Homan, 2002).
Web services are combination of software tools that let application software in one
organization communicate with other applications over a network by using a specific set
of standard protocols. Web services can be described as self-contained, modular units
of application logic that provide some business functionality to other applications
through an Internet connection (Ismail, Patil, and Saigal, 2002). A growing number of
companies are using Web services today to improve customer service and reduce costs
of operations within their enterprises.
Web services allow programs written in different languages on different platforms to
communicate with each other and accomplish transaction processing and other business
tasks. The common format of this machine-to-machine communication was originally
HTML, however, most newer Web services implementations use XML.


Development of Web Services

The first Web services were information sources that programmers incorporated into
software applications. For example, a company that wanted to collect all of its financial
management information into one spreadsheet might use Web services to obtain bank
account and loan balances, stock portfolio holdings, and current interest rates on
financial instruments. If this information is available through Web services, the spread-
sheet program can use those services to update itself automatically. Some of the
information might be available as a Web service at no cost. Other information access




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permission of Idea Group Inc. is prohibited.
170 Schneider


might require a subscription. But Web services can make automated access of the
information much easier (Fingar, 2002).
A more advanced example is a purchasing software application that could use Web
services to obtain price information from a variety of vendors. After a purchasing agent
reviews the price and delivery information and authorizes the purchase, the software can
submit the order and track it until the shipment is received. On the other side of this
transaction, the vendor™s software can use Web services (in addition to providing price
and delivery information) to check the buyer™s credit and contract with a freight company
to handle the shipment (Dyck, 2002).


Current Applications of Web Services

J.P. Morgan Chase & Co., a major investment bank, uses Web services in its investment
information portal to pull information such as economic forecasts, analyses of specific
companies, industry forecasts, and current securities trading markets results into online
reports that customers can access on the company™s customer portal site. The bank™s
customers could each obtain all of this information independently, but the bank™s
aggregation provides a service to its customers. Another example is CUNA Mutual
Group, which sells services such as check clearing and construction management to
credit union customers throughout the United States. CUNA provides many of these
services by running programs on its legacy systems. Instead of reprogramming every-
thing so it could be accessible on the Web, CUNA uses Web services to take information
from the legacy systems and generate Web pages that it makes accessible to its
customers (Pallatto, 2002).
Dollar Rent-a-Car developed a Web services implementation, built with XML, that
connects its reservation system to Southwest Airline™ system. This allows current
information about availability and pricing to be automatically transferred to the South-
west system that runs its reservations Web site. Customers who buy a Southwest airline
ticket can book a rental car on the Southwest site. The transaction is automatically
transmitted back through a Web services connection to Dollar, where the inventory
control and accounting systems are updated in real time (Choi and Whinston, 2002).


The Promise of Web Services

For years, the IT industry has been driven by vendors who promoted proprietary
programming languages and systems that could not communicate with each other easily.
Large companies have been forced to hire substantial programming staffs or consulting
firms to create middleware that could integrate their hodgepodge of programs for order
entry, financial management, inventory control, marketing, and other functions. Since
the idea of successfully and easily connecting software within an organization is still an
unachieved goal in many organizations, connecting software across organizational
boundaries is revolutionary.




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Digital Products on the Web 171


Software has been traditionally sold as a product. Web services allow software and
related knowledge-based products to be sold as a service. This gives sellers more
flexibility to use bundling, versioning, and price-differentiation strategies to increase
profits.
The promise of easy integration (Choi and Whinston, 2002) provides a significant benefit
to customers. Web services built with XML can give organizations the ability to adapt
to changing software environments, as well (Dyck, 2002). However, many companies are
concerned about managing Web services given that the standards are evolving, no
quality-of-service monitoring function has been included in the standards, and the
security of Web services has yet to be tested by a concerted attack (Hall, 2003).




Conclusions
This chapter defined digital products, described their characteristics, and outlined the
environment in which they are offered for sale on the Web. The chapter analyzed pricing
and distribution options for digital products in an online environment and provided
examples of how companies are combining those options into viable revenue models. The
chapter concluded with an analysis of the promises and risks of a combined“delivery,
digital-product medium, Web services.




References
Adamy, J. (2000, September 26). E-tailer price tailoring may be wave of future. Chicago
Tribune, 4.
Bailey, J. (1998). Intermediation and electronic markets: aggregation and pricing in
internet commerce. Ph.D. dissertation. Cambridge, MA: Massachusetts Institute
of Technology.
Bakos, J. (1997). Reducing buyer search costs: implications for electronic marketplaces.
Management Science, 43(12), 1676-1692.

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