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Opportunities and threats for firms providing intangible web goods

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Here the specific business segment environment for intangible web-good providers is analyzed to find further clues for opportunities and threats for this group of firms.

In a first step, relevant forces that shape competition for intangible web-good providers are the center of attention.

By analyzing relevant competitive forces such as “entry barriers,” “buyers,” “suppliers,” “substitutes,” “complements” as well as the “rivalry among intangible web-good providers” on a general level, insights into the attractiveness of this business are given.

Relevant competitive forces for firms providing intangible web goods
In this section the attractiveness of the intangible web-good business segment is analyzed with a modified model of Porter’s five forces.

Porter (1980) outlines that it is not sufficient for firms to be successful by just providing goods with a value for the customer that considerably exceeds the costs of providing the good.

Besides, a firm has to handle five forces that can prevent it from being successful in an industry.

Porter (1985) in this context works with a very broad definition of industry. He explains that it always is a matter of degree to draw industry borders.

For Porter (1985), a useful working definition should encompass all segments for which segment interrelationships are very strong.

Segments where interrelationships are weak may sometimes be separate industries from a strategic viewpoint.

Related industries linked by strong interrelationships may in strategic terms be a single industry.

Since Porter uses this very broad definition of an industry, it seems justifiable to use his instruments to analyze the group intangible web-good providers even though it has been explained before that here a group of firms rather than an industry in the traditional sense is the center of attention.

The relevant forces influencing the success of firms in a specific environment outlined by Potter (1980) are:

The threat of new entrants,
The bargaining power of suppliers and of buyers;
The rivalry among existing firms; and
The threat of substitutes;

It is important to analyze possible changes in these forces with regard to selling intangible goods directly via the Internet to arrive at insights regarding the attractiveness of this business segment.

In addition, with the availability of complements or the existence of providers of complementary goods, a sixth force relevant with regard to the attractiveness of the market for intangible web analysis of competitive forces is on a general level and is laid out to give insight into general issues of firms competing in this field.

No differentiation for particular sub-groups of intangible web-good providers takes place at this point.

The following paragraphs analyze which “new rules of the game” can be observed in the area of intangible web-good provision.

Entry barriers play a crucial role with regard to the possibilities for profits that firms can gain in a market.

Barriers to entry in combination with the reaction of existing competitors to be expected by the entrants determine the threat of entry into a market (Porter, 1980: 7).

With the Internet, a tendency can be observed for market entry barriers to be lowered (Afuah and Tucci, 2001; Hilbert, 2001: 85; Porter, 2001).

E-business enables firms to enter more easily into traditionally hard-to-access markets, because of less expensive product promotion, new sales channels and reduced capital requirements (Bloch et al., 1996; Martin and Kar, 2001).

For instance, in the area of scientific, technical and medical publishing in the age of the Internet a new competitor only needs a contract with the editor plus an Internet connection and a sophisticated hardware-software system to sell journals online.

In contrast, in the traditional marketplace it was necessary to explicate various functions such as binding, printing and physical distribution (either in-house or outsourced), which meant greater coordination requirements combined with higher costs.

In addition to that, the threat of entry increases because Tucci, 2001; Porter, 2001). On the Internet a single participant has global access to sales and factor markets (Kruger, 2002).

Entry barriers are further lowered because it is often difficult to keep Internet applications proprietary (Porter, 2001).

However, various entry barriers are possible with regard to intangible web-good providers’ markets that are hard for potential new entrants to overcome (Hilbert, 2001), especially if they are smaller firms or completely new entrants into the field.

Examples of such entry barriers are differentiation, customer lock-in, network effects, valuable human resources, reputation, and economies of scale and scope.

The technical properties of the Internet make new business activities possible that fit with direct delivery of intangible web goods to consumers.

Online auctions are an example of an intangible web good where the Internet provides an attractive market for firms such as eBay.

Barriers to entry were relatively low in the first place. However, for firms it is possible to realize economies of scale in infrastructure and in aggregation of buyers and sellers and build a reputation.

This has led to disadvantages for new entrants. eBay, as the dominant competitor, profits from first-mover advantages, and was successful in preventing hard price competition in the market (Porter, 2001).

Economies of scope are fairly common in Internet economics (Hilbert, 2001). They are often based on economies of reputation, and make big firms from various areas potential entrants into many intangible web-good markets (Hilbert, 2001).

Further, intangible web-good providers can offer customized or personalized goods to smooth competitive forces.

Cookie file technology makes a customer-specific configuration possible. Yahoo (with My-Yahoo.com), for example, offers a portal screen personalized for each individual customer.

Other intangible web-good providers (such as e-stockbroking providers) offer personalized goods to their customers using direct two-way information flows.

Such customization possibilities offer the potential to lock in customers on an emotional or actual level because of increasing customer loyalty and sunk cost for the personalization process on the customer’s side.

In some markets this can happen through extensive customer learning and adherent switching costs, product differentiation and experience.

First movers can acquire experience with regard to technology utilization as well as the collection of online collected research data on customer needs and wants (Scupola, 2000: 136).

This can lead to the establishment of entry barriers against new competitors in some areas of intangible web good provision (Warkentin et al., 2002).

Utilizing web-based technologies for creating smooth information flows and direct connections to consumers can thus increase the generally low entry barriers.

Other ways to create entry barriers exist in terms of reputation building, exploiting economies of scale and scope, or network effects.

In such situations an intangible web-good provider has opportunities for better positioning in the environment than competitors.

For example, the provision of personalized intangible web goods leads to the improvement of the value proposition for customers and suppliers, and at the same time improves the overall profitability of the intangible web-good provider.

Suppliers or intangible web-good providers include, for example, software developers, various content creators and technique developers.

Suppliers are able to build bargaining power in a market when they can credibly threaten, to raise prices or reduce the quality of purchased goods (Porter, 1980).

If intangible web-good providers are their own suppliers, creating content and offering it online, the hat gaining power of suppliers for this group of firms does not play a crucial role.

Warkentin et al. (2002: 8) in this framework state, “sellers of digital goods (such as Software, news, music, images, or financial information) have been able to bypass traditional intermediaries and deliver exactly the information that the final consumer wants.”

If the intangible web good provider is not the producer of the content it sells via the web, the power of the content supplier increases.

The critical input “content” in such a situation is in the hands of the supplier and not under the control of the intangible web-good provider.

The intangible web-good provider only has access to the distribution channel “Internet.” This access can less and less be evaluated as an extraordinary capability.

Moreover, the technical capabilities of the Internet as a distribution channel increasingly become common knowledge, so no long-term advantages can be built on it.

This implies that suppliers have a high bargaining power against intangible web-good providers if they are not integrated into the intangible web good providers’ business.

In summary, the bargaining power of suppliers is rather low if the Internet is used as a distribution channel for a proprietary intangible web good, while it is higher when the Internet is a distribution channel for- a non-proprietary intangible web good created and sold to the intangible web-good provider by a third party.

Possible suppliers are not only other firms. Human resources n the form of highly skilled employees can exert great power on firms and bargain away a significant fraction of potential profit (Porter, 1980: 28).

Thus, the employees creating the content, developing the software or substantially contributing to the development of the underlying techniques are of high importance to the group of intangible web-good providers and their opportunities to create and appropriate value (Porter, 1999: 8-9).

Highly skilled employees in these areas play a crucial role for intangible web-good providers, and have to be taken into account as a relevant competitive factor when analyzing value-creation potential for intangible web-good providers.

With regard to the bargaining power of suppliers, another “new” group has to be considered.

An observable fact is that there are information intermediaries (digital intermediaries or cybermediaries) that act as information providers and brokers to facilitate market transactions (Bhargava et al., 1999).

This was thought to lead to the eradication of traditional intermediaries (Malone et al., 1987), but in reality no coherent trend is observable today.

Bailey and Bakos (1997) identify four different functions of market intermediaries. They differentiate between functions that lead to an aggregation of buyer and seller (to achieve economies of scale or scope and reduce bargaining asymmetry), and factors that lead to agents of trust, to facilitation (to reduce operating costs), or to a matching of buyers and sellers.

They see re-intermediation in various forms with intermediaries taking on new roles to provide value on the Internet.

Using e-business systems theoretically makes it easier to suppress intermediaries in a distribution network, because of direct customer contact and use of a publicly shared infrastructure (Bloch et al., 1996).

A direct connection between buyer and seller is possible via the web. This leads to the so called “disintermediating” effect.

Disintermediation is facilitated by the low network costs of the Internet. On the other hand, electronic intermediation effects arise.

These effects often occur due to the fact that a direct connection between supplier and buyer, even though possible, is not always the optimum.

The main reasons for this are information overload (Hilbert, 2001), and the adherent increase in cost and time required to go to multiple sites and analyze their quality and relevance.

While the customer often desires a holistic solution, the provider often specializes in one specific area.

In addition, customers often want a trusted third party in order to achieve information about the reputation of a certain supplier.

New electronic intermediaries are a relevant competitive force that can establish power with respect to intangible web-good providers because they can direct customers to particular intangible web-good providers.

However, these intermediaries belong to the group of intangible web-good providers themselves.

In summary, Internet intermediaries as one form of intangible web good providers can take away profits, as well as highly skilled employees and content, software or other critical input providers, from other intangible web-good providers if they are located outside the intangible web good providing firm.

Buyers can exercise bargaining power “by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other” (Porter, 1980).

Buyers for intangible web-good providers are either individual customers or advertisers placing their banners or other advertisements on the sites of the intangible web-good providers.

The main reasons for consumers not to buy via the Internet are lack of interest, no use of the Internet, or the cost of access.

Other reasons lie in the fact that the customers like to shop in person. Security concerns about giving away credit card data via the web, or privacy concerns about giving away personal details online also play a role in preventing potential e-customers from online shopping.

Buyers of intangible web goods have many choices regarding whose goods they buy. Since transparency increased with the advent of the Internet, customers have more possibilities to gain information in a purchasing process.

“With full information, the buyer is in a greater position to insure that it receives the most favorable prices offered to others and can counter suppliers’ claim that their viability is threatened” (Porter, 1980:26).

Even though consumer behavior with regard to the evaluation of goods, including price, does not appear to change to a major degree for electronic purchase transaction, Shankar el al. (1999) observe a tendency for consumers in e-business to be more aggressive with regard to searching out and selecting lower-priced goods.

With regard to well-known brands, the authors report a decrease in the extent to which consumers look for better prices in e-business when variety is greater and the difficulties associated with comparing prices thus increase.

Russo (1977) showed very early that consumers are more likely to shift to lower priced products when their price comparison ability is enhanced.

Degeratu et al. (2000) came to the conclusion that price sensitivity in electronic business appears to mount, given that promotions are available. These build customer expectations of lower prices.

Buyers in e-business transactions are able to exert new types of threats because they can often easily switch suppliers.

In such a situation they may demand new processes or capabilities of their suppliers (Martin and Kar, 2001).

Switching customers will be the consequence if no real value is created. Since Internet business is still a new market with innovative features, customers might find it valuable to do one-stop shopping at Yahoo or Amazon because of certain “habit formation.”

However, they have no reason to stick to this behavior in the long run. Intangible web-good providers can only survive when they create value for their customers, e.g. in the form of valuable content (Porter, 1999), or find ways to lock customers in.

The bargaining power of the single customer, because of lack of concentration, is not high.

However, the outlined characteristics of the buyers’ situation in e-business lead to the conclusion that intangible web good providers might have problems in finding loyal customers who stick with their firm.

The other group of relevant customers for intangible web-good providers consists of the advertisers that place their banners on the websites or engage in various other online advertising activities with intangible web-good providers.

Since television program providers, for instance, also rely heavily on this source of income, it could be argued that such models are beneficial.

However, the business activities of intangible web-good providers that rely solely on gaining revenue via advertisements stand on a weak basis.

Advertisers have a high bargaining power over intangible web-good providers since many intangible web-good providing firms’ business activities solely or to a major part rely on advertisements for income generation.

The situation is even tighter because Internet advertising has become less attractive for firms in the recent past. It still has to be evaluated how successful online advertisements are.

In summary, buyer’s bargaining power has a major impact on the attractiveness of the market for intangible web goods.

The actual customer’s bargaining power, however, can be decreased by the creation of emotional and actual customer lock in and the utilization of differentiation potential.

On the other hand, advertisers contributing a relevant share of income for intangible web good providers have high bargaining power because they can easily switch to other providers, and in addition in the long run will only spend money on online advertising if users do not find ways to avoid looking at the advertisements placed on websites.

Competition, among existing firms that provide intangible web goods is determined by factors such as the extent of competition among them and the kind of price competition.

Competition among existing competitors takes the familiar form of jockeying for position – using tactics like price competition, advertising battles, product introductions, and increased customer service warranties (Porter, 1980).

It is not only entry barriers that are lowered to a certain extent by the Internet. At the same time market transparency, at least at the beginning of its development, increased immensely (Bakos, 1997).

Both effects combined led to fiercer competition in markets affected by the Internet. Decreasing transaction costs and times have made the exploitation of these advantages possible for almost every firm (Kruger, 2002), at the same time leading to greater rivalry.

One feature of competition that lowers the rivalry in a market is customer loyalty. However, customer loyalty seems to decrease in e-business with the competitor “just one click away.

Increased transparency because of the existence of intelligent agents such as shopbots leads to more price competition.

‘Gentleman-like’ rivalry is difficult to maintain, in markets where it is tempting to place one’s product efficiently into the spotlight by cutting the price” (Hilbert, 2001).

The intensity of rivalry among existing competitors is influenced by different structural factors (Porter, 1980), which to a great extent manifest themselves in the price competition among the incumbents.

Often a Bertrand price competition is seen to exist on the Internet (Choi and Whinston, 1998) – that is, a market in which a firm selects a price and stands ready to meet the whole demand for its product at that price.

The rivalry between the firms is extremely intense in such competition if the products or services are quasi-exchangeable.

The only stable equilibrium in such a situation is where the prices correspond to the marginal costs (Bertrand, 1883).

However, as seen above, intangible web goods are not necessarily commodities but can be differentiated.

Such a differentiation smooths price competition and makes it possible to escape Bertrand price competition.

A way of lowering rivalry in the group of intangible web-good providers, as outlined above, lies in binding customers to the own business and differentiating the own goods versus the goods offered by competitors.

The creation of customer loyalty is possible when an intangible web-good provider knows a customer well.

In such a situation it can be advantageous for the customer to stick to the particular firm because her or his special needs are better addressed if mutual knowledge between buyer and seller increases with each transaction.

Because of first-mover advantages, for instance with regard to an already established reputation and improved electronic capabilities, existing competitors may be able to weaken another firm’s competitive position even though e-business enables firms to catch up with their competitors due to the maturity of some technologies and learning experiences.

With regard to the consequences of increasing transparency, e-business enables better searches and simplifies comparisons.

Nevertheless, other factors (such as search costs, price sensitivity, product differentiation and brand recognition) may also play an important role in determining consumer online-buying decisions (Kauffman and Walden, 2001).

The Internet makes differentiation advantages possible that do not only lie in the area of price but also in the field of product innovation, time to market and customer service.

Better customer relationships are possible for intangible web-good providers than for traditional digital good providers because personalization and mass-customization become possible (Scupola, 2000).

Differentiation of an intangible web good in the eyes of the customers can lead to less rivalry.

The Internet can contribute to low costs in a market, because cheaper product promotion and distribution in comparison to traditional channels becomes possible.

In addition, the Internet allows small firms to compete with much larger ones by using a low-cost infrastructure (compared to the cost of the required traditional infrastructure) to promote their intangible web goods globally.

However, intangible web-good providers have an immense problem to rebuild trust on the customers’ side if it is once destroyed.

An unsatisfied customer in the “real world” might tell five friends. An unsatisfied intangible web-good customer can easily inform 5000 “friends” in a community forum about the perceived deficits of the providing firm.

Further, for intangible web goods advantages that base on geographical location can cease to exist.

At the same time, however, national borders can still have an impact because of different regulations, taxation legislation etc as outlined in the PEST analysis above.

In sum, the Internet has led to greater rivalry in many fields, because the number of competitors has increased rapidly and firms from all over the world can sell intangible web goods to nearly all customers.

On the other hand the market has increased massively for certain intangible good providers on the Internet because their market is the whole world (Afuah and Tucci, 2001: 126).

With regard to commodity-like intangible web goods, rivalry is very high between incumbents.

As soon as an intangible web good is differentiated, rivalry is smoothed. Since intangible web-good providers do not belong to the same industry in the traditional sense, they are subject to different degrees of rivalry.

However, the properties of many intangible web goods (such as worldwide competition, increasing transparency and a cost structure with lower variable cost relative to fixed cost) imply a tendency to greater rivalry.

For commodity-like intangible web goods a Berfraud price competition often is the result, while providers that are successful in differentiating their intangible web goods in the sexes of the customer (whether through a good reputation of the establishment of a valuable intangible web-good brand) can successfully escape Bertrand price competition.

Firms always have to take possible substitutes for their goods into account, when competing in a certain market, in terms of searching for other goods that perform the same function (Porter, 1980).

Examples of substitutes of intangible web goods arc print media, libraries, traditional software sellers and television providers. Substitutes for intangible web goods have by definition to be located outside the Internet.

The danger of such substitutes is limited because of the technical properties and resulting superior performance possibilities of the Internet.

For example, the innovative search possibilities in online databases with content downloadable on demand beats the properties of a traditional library and creates more value for the customer.

Traditional goods that are substitutes for intangible web goods are, however, endangering profits that may be generated in the field of intangible web goods for other reasons.

Customers may prefer to purchase via traditional distribution channels because of trust concerns with regard to the Internet distribution channel.

As outlined above, certain socioeconomic as well as technological forces can prevent customers from buying online.

With regard to certain intangible web goods such as online encyclopedias, some customers may prefer the book version – as documented in increasing sales of encyclopedias especially in schools and libraries (Walsh, 2003).

However, it seems unlikely that an encyclopedia publisher can survive solely by selling hardcover encyclopedias.

The outlined customer concerns, and not the properties of the substitutes (which are mostly inferior to intangible web goods in their inherent technical performance capabilities), can make them a serious danger to success with intangible web goods.

Intangible web-good providers have to find ways to increase customer value delivered through their goods to such an extent that customers overcome their negative attitude toward buying online, or engage in online its well as complementary offline activities.

Complements for intangible web goods are all those goods that are necessary to make the use of intangible web goods possible or easier.

Examples are MP3 players to play downloaded music, or the Acrobat Reader to read digital content in pdf format.

If such complements do not exist for the intangible web-good provider, value creation is nearly impossible.

In this context standardization processes often play a crucial role for value generation with intangible web goods.

In the Internet environment the complementarities of intangible web goods ale relevant with regard to the attractiveness of a market, since intangible web-god providers are able to find new selling possibilities on the Internet when they can manage the specificities of complementarities.

Intangible web-good providers can use complementarities to realize income. The publishing house Elsevier, for instance, provides tables of contents for its journals as a costless service for the customer on the web provides free push services and sends content alerts to customers via e-mail as a costless service, but charges for the actual download of the complementary articles.

Customers can undertake free full text searches in the archives of The Wall Street Journal, The Economist or the German weekly magazine Der Spiegel, but have to pay for downloading the complementary goods, i.e. particular articles.

These providers of intangible web goods all offer the index or the search service for free to improve the selling possibility of the content (Shapiro and Varian, 1999).

This content can either be purchased in the form of an intangible web good (e.g. downloadable article) or as a real world product (e.g. weekly magazine sold at the kiosk).

Possibilities of splitting an intangible web good into complementary parts thus can increase value-creation opportunities.

If an intangible web-good provider is able to offer a large collection of complementary goods and sell them to the customers, it can realize advantages with regard to locking customers in.

Thus, the existence and relevance of complementarities in the area of intangible web goods can enhance the attractiveness of tile business for intangible web-good providers already in the market.

Many intangible web goods are characterized by complementarities and thus, even though no general analysis of availability of complements for all conceivable intangible web goods is possible because they are too different in terms of complements, it is important to include the existence of complements in analyses of value-creation possibilities for intangible web good providers because they are crucial for the firms belonging to this group.
 

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