Revenue sharing
| Category: E-commerce | Date: 2003-10-23 |
Its bad enough that many struggling electronic commerce companies are years away from posting anything resembling earnings, but now theyre not even pocketing all of their own revenues.
There are many variations on the revenue sharing business model at work on the web. Industry analysts agree that were only going to see more of these deals down the road. This means a smaller piece of the $8 billion e-commerce pie for all the players, pushing actual profits even further into the future. "Weve had more inquiries about revenue sharing deals in this years first quarter than we did all of last year," says Jonathan Nelson, CEO of the Boston-based agency Organic Online, which takes a cut of the sales on the e-commerce sites it builds and services.
Revenue sharing can apply to anything from portals and web sites that get a percentage of sales from traffic they refer to a site to software companies that facilitate online sales and take a cut of each transaction. The phenomenon no doubt stems from the uncertainty surrounding the e-commerce proposition. Jupiter analyst Marc Johnson says that companies want their e-commerce partners "to get more skin in the game," so to speak, by linking their compensation to an initiatives success.
"Why would you share revenues unless you cant go out there and get them yourself?"
It is, however, important to distinguish between the revenue sharing strategies of companies operating from a weak position and those of firms operating from a strong position. Some e-commerce outfits do revenue share deals out of fear, attempting to minimize risk, stanch loss and bolster faltering revenues. "Bottom line, why would you share revenues unless you cant go out there and get them yourself?" says Barrett Associates portfolio manager Larry Seibert, whose firm currently has $1.5 billion under management.
On the flip side are e-commerce firms using revenue sharing successfully to boost their own market share. Companies like Amazon.com amzn (nasdaq: amzn) and CDnow cdnw (nasdaq: cdnw) are giving affiliate sites that post links to them a cut of sales the traffic generates in order to establish the lead in their respective markets. Both are racing to protect their online market leadership against the encroachment of established brands. Neither will reveal what proportion of revenues these sales account for. But according to the Gartner Group, Amazon has 200,000 affiliates funneling customers its way, CDnow about 180,000. "Where would you rather be?" asks Gartner Groups e-commerce analyst Roy Satterthwaite, "Out there on your own or with a couple hundred deputies helping you fight the e-commerce war?"
Another group benefiting from revenue sharing is the pickaxe set, those companies that sell e-merchants the tools to create and mine affiliate networks. The affiliate marketing company LinkShare administers programs for 150 merchants--including Avon and 800 Flowers--and 65,000 satellite sites. Dell Computer dell (nasdaq: dell) launched with LinkShare on Tuesday and had 70 affiliates sign up in the first 12 hours. Another affiliate company, BeFree, sells affiliate technology to companies that build their own programs (e.g., barnesandnoble.com and Reel.com). One of BeFrees cofounders, Tom Gerace, says his clients reap between 15% and 35% of their overall revenue through these networks. BeFree recently announced a partnership with GeoCities, giving its 3.5 million community members the ability to profit from putting merchant links on their home pages.
Others using revenue sharing to their advantage include some infrastructure companies, which handle the behind-the-scenes back end processes and profit from each transaction theyre part of.
CyberCash, for instance, executes payments online and gets anywhere from five cents to ten cents per transaction. The key to success for a company like this is making its technology become industry standard. "If they do," says Barretts Larry Seibert, "they win big." If they dont, theyll fall flat.
In the physical sales channel, there have always been a number of players profiting from any transaction, like distributors and credit card processors, most of which are paid a flat fee. The difference now is that any given online sale is going to have a lot more hands in the till and that on the Internet these intermediaries can be rewarded according to the level of their performance.
This is not good news for some companies. "There are those who are revenue sharing because they dont have a clue about e-commerce and want to push their risk off onto someone else," says Gartners Satterthwaite. As examples he cites e-commerce software development companies like Open Market omkt (nasdaq: omkt), which had layoffs last quarter, and BroadVision. These companies have begun striking deals with the merchants and resellers buying their software, getting some payment up front and then a percentage of all sales the software supports. They used to sell applications for a flat fee.
The trouble is these firms have taken a lot of investment from venture capital firms, but their software sales are simply not growing fast enough to support their burn rate, or the speed at which they spend their capital. Theyre being undermined by stores in a box and cheaper solutions like Intels iCat and $5,000 e-commerce platforms from Microsoft msft (nasdaq: msft) or IBM ibm (nyse: ibm). Open Market and BroadVision packages can cost as much as $100,000. "Theyre seeing sales increase," says Satterthwaite, "just not as much as they need to stay alive, so theyre striking more revenue sharing deals."
Open Markets vice president of marketing, Jeff Bussgang, spoke enthusiastically about revenue sharing at a recent PaineWebber Internet conference. Open Market hoped that signing revenue share deals with Internet service providers like AT&T and France Telecom, who in turn set up Internet commerce services for merchants and give Open Market a piece of every transaction, would "drive sales like gangbusters," says Satterthwaite.
One companys failure in e-commerce will undoubtedly wipe out several others further down the food chain.
"ISPs have had poor results as commerce service providers because they lacked Internet savvy," Satterthwaite explains, adding that Open Market has admitted its ISP deals havent worked out the way it had hoped. "Open Market sells to the ISP on revenue share and the ISP sells to customers on revenue share," he explains. "So its a trickle-down theory, which isnt too fruitful." AT&T t (nyse: t) declined to reveal any sales figures for its SecureBuy e-commerce package, which uses Open Market software.
Open Markets Bussgang cites its deal with Lycos lcos (nasdaq: lcos) in which the portal will use Open Market software for all its e-commerce as one thats "going to be worth tens of millions of dollars." He says that if the Lycos/USA deal goes through, that the billions of dollars that flow to its Home Shopping Network will be channeled through Lycos online stores. He also points optimistically to Lycos plans to recruit small businesses to build stores on its site using Open Market products.
However, the USA deal is anything but definite and according to Satterthwaite theres no evidence that Lycos has begun setting up stores. Lycos Vice President of e-commerce Jeff Bennett declined to put a number on the merchants hes signed. "Open Market is only going to be as successful as Lycos is in this," says Gartners Satterthwaite.
That caveat goes straight to revenue sharings viability as a business model. Its certainly an excellent way to motivate partners or increase sales at an inexpensive and exponential rate. But no matter what kind of market dominance a firm establishes, there comes a point where this position must translate to profits. This cycle can perpetuate itself for only so long, so the risk of all these ephemeral e-commerce companies relying on one another is that it creates little more than a house of cards. One companys failure in e-commerce will undoubtedly wipe out several others further down the food chain. The question on the minds of Internet executives and the investors.
About the author.
:To contact see details below.
ppatsursis@forbes.com
http://www.forbes.com
There are many variations on the revenue sharing business model at work on the web. Industry analysts agree that were only going to see more of these deals down the road. This means a smaller piece of the $8 billion e-commerce pie for all the players, pushing actual profits even further into the future. "Weve had more inquiries about revenue sharing deals in this years first quarter than we did all of last year," says Jonathan Nelson, CEO of the Boston-based agency Organic Online, which takes a cut of the sales on the e-commerce sites it builds and services.
Revenue sharing can apply to anything from portals and web sites that get a percentage of sales from traffic they refer to a site to software companies that facilitate online sales and take a cut of each transaction. The phenomenon no doubt stems from the uncertainty surrounding the e-commerce proposition. Jupiter analyst Marc Johnson says that companies want their e-commerce partners "to get more skin in the game," so to speak, by linking their compensation to an initiatives success.
"Why would you share revenues unless you cant go out there and get them yourself?"
It is, however, important to distinguish between the revenue sharing strategies of companies operating from a weak position and those of firms operating from a strong position. Some e-commerce outfits do revenue share deals out of fear, attempting to minimize risk, stanch loss and bolster faltering revenues. "Bottom line, why would you share revenues unless you cant go out there and get them yourself?" says Barrett Associates portfolio manager Larry Seibert, whose firm currently has $1.5 billion under management.
On the flip side are e-commerce firms using revenue sharing successfully to boost their own market share. Companies like Amazon.com amzn (nasdaq: amzn) and CDnow cdnw (nasdaq: cdnw) are giving affiliate sites that post links to them a cut of sales the traffic generates in order to establish the lead in their respective markets. Both are racing to protect their online market leadership against the encroachment of established brands. Neither will reveal what proportion of revenues these sales account for. But according to the Gartner Group, Amazon has 200,000 affiliates funneling customers its way, CDnow about 180,000. "Where would you rather be?" asks Gartner Groups e-commerce analyst Roy Satterthwaite, "Out there on your own or with a couple hundred deputies helping you fight the e-commerce war?"
Another group benefiting from revenue sharing is the pickaxe set, those companies that sell e-merchants the tools to create and mine affiliate networks. The affiliate marketing company LinkShare administers programs for 150 merchants--including Avon and 800 Flowers--and 65,000 satellite sites. Dell Computer dell (nasdaq: dell) launched with LinkShare on Tuesday and had 70 affiliates sign up in the first 12 hours. Another affiliate company, BeFree, sells affiliate technology to companies that build their own programs (e.g., barnesandnoble.com and Reel.com). One of BeFrees cofounders, Tom Gerace, says his clients reap between 15% and 35% of their overall revenue through these networks. BeFree recently announced a partnership with GeoCities, giving its 3.5 million community members the ability to profit from putting merchant links on their home pages.
Others using revenue sharing to their advantage include some infrastructure companies, which handle the behind-the-scenes back end processes and profit from each transaction theyre part of.
CyberCash, for instance, executes payments online and gets anywhere from five cents to ten cents per transaction. The key to success for a company like this is making its technology become industry standard. "If they do," says Barretts Larry Seibert, "they win big." If they dont, theyll fall flat.
In the physical sales channel, there have always been a number of players profiting from any transaction, like distributors and credit card processors, most of which are paid a flat fee. The difference now is that any given online sale is going to have a lot more hands in the till and that on the Internet these intermediaries can be rewarded according to the level of their performance.
This is not good news for some companies. "There are those who are revenue sharing because they dont have a clue about e-commerce and want to push their risk off onto someone else," says Gartners Satterthwaite. As examples he cites e-commerce software development companies like Open Market omkt (nasdaq: omkt), which had layoffs last quarter, and BroadVision. These companies have begun striking deals with the merchants and resellers buying their software, getting some payment up front and then a percentage of all sales the software supports. They used to sell applications for a flat fee.
The trouble is these firms have taken a lot of investment from venture capital firms, but their software sales are simply not growing fast enough to support their burn rate, or the speed at which they spend their capital. Theyre being undermined by stores in a box and cheaper solutions like Intels iCat and $5,000 e-commerce platforms from Microsoft msft (nasdaq: msft) or IBM ibm (nyse: ibm). Open Market and BroadVision packages can cost as much as $100,000. "Theyre seeing sales increase," says Satterthwaite, "just not as much as they need to stay alive, so theyre striking more revenue sharing deals."
Open Markets vice president of marketing, Jeff Bussgang, spoke enthusiastically about revenue sharing at a recent PaineWebber Internet conference. Open Market hoped that signing revenue share deals with Internet service providers like AT&T and France Telecom, who in turn set up Internet commerce services for merchants and give Open Market a piece of every transaction, would "drive sales like gangbusters," says Satterthwaite.
One companys failure in e-commerce will undoubtedly wipe out several others further down the food chain.
"ISPs have had poor results as commerce service providers because they lacked Internet savvy," Satterthwaite explains, adding that Open Market has admitted its ISP deals havent worked out the way it had hoped. "Open Market sells to the ISP on revenue share and the ISP sells to customers on revenue share," he explains. "So its a trickle-down theory, which isnt too fruitful." AT&T t (nyse: t) declined to reveal any sales figures for its SecureBuy e-commerce package, which uses Open Market software.
Open Markets Bussgang cites its deal with Lycos lcos (nasdaq: lcos) in which the portal will use Open Market software for all its e-commerce as one thats "going to be worth tens of millions of dollars." He says that if the Lycos/USA deal goes through, that the billions of dollars that flow to its Home Shopping Network will be channeled through Lycos online stores. He also points optimistically to Lycos plans to recruit small businesses to build stores on its site using Open Market products.
However, the USA deal is anything but definite and according to Satterthwaite theres no evidence that Lycos has begun setting up stores. Lycos Vice President of e-commerce Jeff Bennett declined to put a number on the merchants hes signed. "Open Market is only going to be as successful as Lycos is in this," says Gartners Satterthwaite.
That caveat goes straight to revenue sharings viability as a business model. Its certainly an excellent way to motivate partners or increase sales at an inexpensive and exponential rate. But no matter what kind of market dominance a firm establishes, there comes a point where this position must translate to profits. This cycle can perpetuate itself for only so long, so the risk of all these ephemeral e-commerce companies relying on one another is that it creates little more than a house of cards. One companys failure in e-commerce will undoubtedly wipe out several others further down the food chain. The question on the minds of Internet executives and the investors.
About the author.
:To contact see details below.
ppatsursis@forbes.com
http://www.forbes.com
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