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Making it to the top

Brian Neilson kicks off a debate on who will eventually hold the balance of power as global players buy up IT, telecomms and Internet companies.

Imagine life as a monopoly game. The players are buying up IT, telecomms and especially Internet companies. Wheels within wheels and deals within deals. The clock strikes 12 and everyone is tired - now it's time to count up. Who owns what and who wins the game?

Here are some scenarios:

  • A few giant telcos, after more mega-mergers, dominate Bandwidth Street, and a significant part of Content Street as well. Apart from these global consortia, only Microsoft retains a significant independent presence on Content Street. It sells off its Platform Street properties that nobody really cares about anymore.
  • Early in the game, Hollywood production companies and TV networks buy up all the properties on Eyeballs Avenue. They move from there to take over Content Street and in the process wield the balance of power. Telcos manage to hang on for dear life in Bandwidth Street. Microsoft got stuck in jail but after missing three turns came back to create software for everyone on Eyeballs Avenue. In the process it maintained control of Platform Street.
  • Microsoft manages to get rid of the Antitrust Chance card and eventually succeeds in dominating just about every street on the board, including Content Street and Banking Boulevard.
  • Microsoft teams up with a global telecommunications consortium to dominate Mobile Access Expressway, paving its way for dominance of Eyeballs Avenue.

OK, so this is childish. So who will hold the balance of power at the end of the day? (Assuming there were to be an "end of the day", as we all know there will be.)

I propose to answer this question by starting a process of debate, and using this column as a forum. I will sow some seeds to get the ball rolling. Let's start with the following:

  • Internet access providers (including telcos)
  • Web portals
  • Media giants (eg Disney, TV networks et al)
  • Software companies - particularly those making browsers

Global companies are starting to turn their attention to local markets.

In SA, everything is still very fluid, so we can start with the global players. Which by the way reminds me. The global players are moving in, so this is a good place to start looking for answers. However, local companies like M-Web and Yebo!net are focusing on acquiring consumer eyeballs, and it may well serve as fuel to the debate of how to best go about doing so...

After the May 1998 deal between AT&T WorldNet, @Home, and Excite, IDC made the following analysis. This followed the joint venture between Yahoo! and MCI Communications, called Yahoo! Online.

IDC's analysis: Does vertical integration create value?

"One of the keys to the Net's growth has been the separation of its various layers - user hardware, user software, access, server software, server hardware and content - and the cultivation of many competitors at each layer. @Home's acquisition of Excite has forced the Internet industry to take another look at integrating content and access.

"America Online is the exception. It's a holdover from the days when being an 'online service' meant adding value by integrating all those layers. Even AOL has sold its network and opened its services to users who do not buy access from AOL. Is it possible to build 'another AOL' or even 'a better AOL' in the current market?"

The observation

After thorough examination of Internet access provider market shares before and after the deals (see the full article from Barry Parr at http://www.idc.com/EI/default.htm), IDC concluded that portals do not drive substantial users to use related access services. AOL being the only exception, of course, but then it was always vertically integrated, and somehow it is still able to excel in catering to new users.

What does work?

Browsers do. But they create portals, not necessarily subscribers for access providers. To quote from IDC again:

"Browsers have played a huge role in creating the current portal landscape. Sites that have benefited from browser connections include the following:

  • Yahoo!, which had a prominent position on Netscape's original search page.
  • Excite, which took advantage of Yahoo's unwillingness to pay for that slot.
  • Netcenter, which Netscape created out of thin air.
  • AOL.com, which is the least useful portal on the Net and one of its most heavily used sites.
  • MSN, which was created from the wreckage of Microsoft's online service, benefited greatly from both browser promotion and its connection with Hotmail.

"An IDC report called Online Nation: 1998 US Internet User Survey (IDC #W17684, December 1998) showed that 35.4% of users were still using their browser's default startup page (Netscape, Microsoft, AOL, or the corporate home page). Another 21.9% didn't know to what page their Web browsers opened.

"Why are browser companies more powerful than access companies? The browser market has only two competitors. Browsers provide multiple ways to integrate Web sites in their interfaces. The access market, by contrast, is severely fragmented, with no player other than AOL holding more than 6.5% of the market."

Predictions and recommendations

These are IDC's closing comments on this type of deal:

"IDC expects more content companies to build relationships with access companies. And if they can get the kind of valuation that Excite got, it might be worthwhile for them to do so.

"However, it is doubtful that these deals make long-term economic sense. In the long run, it will be better for both access companies and content companies to cut the best deal they can in the marketplace.

"We believe that television and other content companies are better partners (and owners) for portals and content sites. They are driven by creativity and marketing, not by operations. Their businesses' speed and character are fundamentally different from those of telecommunications and networking companies, for which planning and process are paramount. They are better able to help Web sites build brands among the tens of millions of users who will go on the Net in the next few years.

"Web companies looking for partners should consider looking for media companies and other Web companies, preferably ones that own as little infrastructure as possible.

"Access companies should merge with other access and telecommunications companies. They should admit that they're in the pipe business, not show business."

The local context

As I noted earlier, I want this to be a kick-start to a dialogue. But I will make a simple observation. "Local bly mos lekker" but global companies are starting to turn their attention to local markets.

The first observation is that the next round of big deals between local "portals" and access providers might well be with global buyers, rather than "deals within deals" among the local community. Global telcos are already lining up their sights - so watch this space!

Secondly, Microsoft is one such global player, and its MSN portal has moved into SA. This is a significant move in its own right, quite independent of Microsoft's software company and its local prominence. This is even bigger in SA in Browser Street - unlike the US, where Internet Explorer has a similar share to Netscape, and AOL is still a player.

I was also highly impressed with Microsoft's 2000 vision. The company is focusing squarely on the emerging generation of "killer apps" in the corporate world, and will no doubt corner a significant majority of this critical territory. Perhaps at least the last scenario in our Monopoly game analogy could be a reality. Watching Microsoft and British Telecom team up to create a dominant force in the next generation of mobile Internet access makes this all the more realistic.

I have had some good feedback on previous articles, so please feel free to e-mail me on brian@bmi-t.co.za if you want to kick the ball around further on this topic.

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