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Robert North

The Internet is a transformational medium whose impact on companies, culture, and individual lives is of no less impact than the invention of the printing press and movable type. It is capable of affecting companies and individuals in ways which increasingly permeate our lives. Most obviously it enables companies to conduct business with their customers and suppliers, often times in a more streamlined, efficient manner. However, the evolution of the Internet has also created risks for businesses and even entire industries; companies have been caught off-guard as new internet-based business models have developed, and are unable or unwilling to adopt new business practices. This causes problems because the network effect of the Internet allows issues to evolve much faster than management are traditionally conditioned to react to.

Threats

Sector-wide threats

The Internet can destroy entire market sectors. For example, the local travel agency sector has been severely affected by the availability of online booking facilities, which have enabled airlines and hotels to easily do business direct with their customers. American Express Company (AXP) is an example of a major travel agency that has seen demand for their travel-related services decrease as more consumers and businesses rely on online travel portals.

Another example of a market sector facing rapid change is the Music and Video Store industry. Music stores have faced increasingly tough times as their primary demographic of customers have turned to obtaining music online, first through music-sharing portals such as Napster, as well as Usenet and various torrent portals. As the market for digital music has expanded and usage of digital music players has gained widespread adoption, customers of all demographics have turned to more mature, legal options for downloading music, such as Apple (AAPL) 's iTunes store. Music store stalwarts such as Tower Records went out of business; others, such as Virgin Megastores, embraced the new technologies and incorporated digital music as part of their online presences. (It should be noted that the music store industry also faced other pressures, particularly from chains such as Wal-Mart (WMT) and Best Buy (BBY), in terms of product pricing, which also contributed to some of the industry's troubles.) Similarly, the video store industry faced huge upheaval with the establishment of Netflix (NFLX), an internet-based video rental company whose monthly fees and convenient delivery to the home via U.S.P.S. caught on quickly with customers. Video store rental veteran Blockbuster Video (BBI) struggled for some time, but has revived itself over the past 2 years by providing similar delivery services to those of Netflix (NFLX) , as well as a retail storefront for customers less familiar with the Internet. However, both of these chains, as well as their smaller competitors, still face future changes as the concept of Video-on-Demand looms as a viable option for consumers in the not-too-distant future, and the entire Video Rental industry, both online and brick-and-mortar, will likely face significant competition from Cable Operators.

Yet another example of a sector-wide threat brought on by the Internet is the issue of piracy. For example, Microsoft (MSFT) loses $19 billion dollars in profits to software piracy alone. The Music and Motion Picture industry have also been negatively impacted by rampant piracy of their products. The RIAA (Recording Industry Association of America) reports that $12.5 billion dollars are lost each year to illicit music file sharing.^[1]. Internet file sharing through various portals such as Bittorrent, IRC, and DC++ dramatically cut into profits of nearly every sector of the entertainment and software industry from Adobe Systems (ADBE) Photoshop to Activision Blizzard (ATVI) Call of Duty 4 and Warner Music Group (WMG) Atlantic Records sales. Many companies are now devoting significant amounts of their budgets to battling internet piracy, something unheard of just 10 years ago.

The 'abolition of geography'

Whilst many would see this as an opportunity (see the section below) this can be a threat to many existing business models which have relied upon geographic diversity to fully exploit markets and reduce 'consumer profit'. For example, the motion picture industry has traditionally segmented its distribution by region, both in the timing of releases, and in pricing of DVD versions. However the Internet allows a much greater awareness of pricing levels in different regions, and consumer disquiet tends towards forcing a global pricing model. Whilst there have been some technical attempts to fight this - for example by adding region-encoding to DVDs - this is rebuffed by consumer 'champions' creating workarounds (Multi-region DVD players etc)

Company-specific threats

The Internet provides numerous communication vectors (like this very site) where information can be exchanged. Companies need to keep informed about the references being made to them on the Internet. The extent to which companies are Internet ‘savvy’ in reacting to references made to them on the Internet – for example in discussion forums, blogs, and protest sites - yields interesting clues as to how aware the management are of their actions on the ground, which can be particularly valuable insights for the investor.

Opportunities

Sector-wide opportunities

The 'abolition of geography'

On the other side of the coin, the Internet provides opportunities primarily by enabling local organizations to reach out beyond their traditional geographic scope. This either allows them to reach more customers, or to reach their existing customers without the costs of involving intermediaries. See E-Commerce.

Reduced barriers to entry

The companies best placed to take advantage of this are those already involved with technology and Information Technology in particular, for example software companies such as Adobe Systems (ADBE) and Microsoft (MSFT) However they also need to react quickly to ensure they are not threatened by new-entrants to the market taking advantage of the reduced barriers to entry that the Internet affords.

Microsoft (MSFT) notably had pivotal moment in its history when it realised that the Internet would have an overwhelming impact on its hitherto non-networked software business, and vowed to re-focus around the Internet.

Outsourcing

The communications efficiencies also allow companies to more easily outsource their staff to regions where their costs are lower, however this must be done sensitively to avoid the threat of consumer backlash if the service quality is lowered, or if it is perceived that the company is adversely affecting the communities in which they previously operated.

References

1. ↑ The RIAA FAQ