Reviewing the business models of the "four horsemen"

The financial press, like CBS MarketWatch.com, has begun referring to America Online (AOL), Yahoo!, eBay and Amazon.com as the "four horsemen" of the Internet because they are leading the charge of businesses getting online. These pioneering companies of online business have found success by satisfying the needs of consumers through different business models. For instance, eBay unites buyers and sellers online through its auction model, and Amazon.com has become the largest seller online by employing a retail oriented model.

Think of a business model as the way a business operates to make money. For instance, Dell Computer and Compaq Computer both manufacture and sell computers, but have different business models. Dell builds computers and sells them directly to customers from orders it receives over the phone or online. Compaq, on the other hand, builds computers and then sells them to customers through third party outlets, like distributors and retail stores. The difference in these business models, selling direct or through a third party, has led to the recent success of Dell Computer and disappointment at Compaq.

By studying the business models of the "four horsemen," you will learn what works today in the online world, and be able to design your own business model accordingly. Although it is unlikely that you will be able to duplicate the success of these "four horsemen" by simply copying their current business models, familiarizing yourself with how they operate and make money will improve your chances for success.

America Online (AOL) 

To many people, AOL is the Internet. However, in a filing with the Securities and Exchange Commission (SEC), AOL describes itself as "the world's leader in interactive services, Web brands, Internet technologies, and electronic commerce services." Unfortunately, this general description doesn't tell you much about it's business model. It's only until you dig deeper into the same SEC filing, that you begin to learn the business model of AOL, and how it makes money.

According to the filing, AOL "generates three main types of revenues: subscription services; advertising and commerce; and enterprise solutions revenues. Its subscription services revenues are generated from customers subscribing to its AOL and CompuServe services. Advertising, commerce and other revenues mainly consist of advertising and related revenues, fees associated with electronic commerce and the sale of merchandise. Enterprise solutions revenues consist principally of product licensing fees and fees from technical support, consulting and training services."

Currently, AOL's main source or revenue is from its subscription services, or its business of being an Internet Service Provider (ISP). This is perhaps why many people think AOL is the Internet -- since it has over 20 million people accessing the Internet through its subscription services. However, this portion of its business model (getting people online through their PCs and dial-up connections) separates AOL from the businesses of Yahoo!, eBay, and Amazon.com.

Yahoo! 

Yahoo! is more like AOL than eBay or Amazon.com because it generates most of its revenue from advertising. The Yahoo! business model relies on selling advertising to other businesses that want to promote their products and services to the Yahoo! user base. In fact, it operates much like a television network, where advertisers pay to run commercials of their products and services for the network's viewers.

An SEC filing, describes Yahoo! Inc. as a "global Internet media company that offers a branded network of comprehensive information, communication, and shopping services to millions of users daily. As the first online navigational guide to the World Wide Web (the "Web"), www.yahoo.com is a leading guide in terms of traffic, advertising, household and business user reach, and is one of the most recognized brands associated with the Internet."

In most surveys, Yahoo! is usually recognized as the number one site on the Internet in terms of visitors or page views. Yahoo!'s popularity can be attributed to its engaging content and ease-of-use. In simple terms, Yahoo! attracts a lot of "eyeballs" and can therefore charge hefty premiums for businesses that want to advertise on its site.

eBay 

eBay has become synonymous with online auctions. In its words, "eBay pioneered online person-to-person trading by developing a Web-based community in which buyers and sellers are brought together in an efficient and entertaining auction format to buy and sell personal items such as antiques, coins, collectibles, computers, memorabilia, stamps and toys."

In the eBay business model, revenue is generated from auction related services. Sellers pay eBay a fee to list their products on the auction Web site, and also a percentage of any sales that are made. Since eBay does not actually sell the items that are listed, the sellers do, it does not have any of the procurement, inventory, or shipping expenses that are associated with other online auctioneers or e-commerce businesses.

You should be aware that both Yahoo! and Amazon.com now also provide online auction services. However, auctions are only a small portion of their total business models, and have yet to be as successful as eBay's primary business model.

Amazon.com 

Amazon.com became one of the "four horsemen" after being one of the first commercial ventures to successfully initiate the retail model online. Initially it was "earth's biggest bookstore," but has now broadened its offerings to include music, auctions, toys, electronics and more. The Amazon.com model is all about selling products over the Internet. It maintains warehouses of merchandise that its customers can buy through its Web site.

Additionally, according to an SEC filing, "Amazon.com provides a community of online shoppers an easy and safe way to purchase and sell a large selection of products through Amazon.com Auctions. Amazon.com is a proven technology leader; the Company developed electronic commerce innovations such as 1-Click ordering, personalized shopping services and easy-to-use search and browse features."

The Amazon.com model is one of the most popular to imitate today by traditional offline retailers. These offline retailers are becoming known as "click and mortar" stores as they move their businesses online.