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The downturn in the Nasdaq since its euphoric March highs has focused more minds than ever before on this quest for profit. However, nobody seems much clearer about how exactly to get there. This morning interactive investor international (LSE: IIN) slightly shocked investors by reporting that revenues had reached a plateau, remaining at £1.8m for the second quarter, the same level as the first three months of the year. Operating losses fell by a third to £4.8m, compared with the last quarter. So iii may be moving in the right direction.
But when web-based businesses have at last attained the pinnacle of profitability and glance back, today's skirmishes will look like mere scrabblings on the foothills. However, other issues have recently come to the fore, which have challenged established ways of doing business. The Internet is undoubtedly changing the way organisations operate. The culture of the web is far removed from that of the off-line world. The rules of the game and the methods we use to carry out transactions don't seem to work in the same way. Businesses will have to think seriously and accommodate this thinking if they want to prosper in this electronic free-for-all.
Rip up the rules
Perhaps you think this is pompous rubbish. However, the case of Napster's recent run-in with record companies in America has thrown this cultural shift into sharp relief. Napster wrote a piece of software enabling MP3 users to swap pieces of music they had downloaded with others. What's wrong with that? I lend people books and CDs all the time. The recording companies feared revenues would eventually drop and claimed their copyrights were being breached, winning an injunction to close the company's site down. Napster has won the right to appeal against this court injunction. This will be heard later this month.
This case raises interesting issues of ownership and control in the electronic arena. On the surface it seems the law cannot keep up with the technology being created today. It has become so easy to produce material and publish it worldwide in minutes. Nobody can contain it. It becomes very hard to get people to pay for any published material, whether it is software, music or entertaining and informative content of any kind.
Freedom of information
Before the Internet information was still free. You just had to go to a library to access it. The web's format is very much like a library, offering essentially free access to a wide range of archives. In short the web is a wonderfully rich resource, where there are no entry fees. Those that have tried to charge money for access generally haven't prospered. The Wall Street Journal still charges a subscription fee but the Encyclopedia Britannica, for instance, was forced to become free.
In pre-Internet days, though, people paid a fee for convenient distribution of news. You bought a paper each morning, because you could read it at your leisure on your way into work, so not having to wait for news coming out for free on the radio. However, nowadays you can get a news update whenever you want it via a few clicks on your computer. However, although this is extremely convenient, people are reluctant to pay for this ultra-efficient service.
Take that most basic of products: milk. If you have it delivered it costs slightly more than buying it in bulk at the supermarket. You are paying a premium for the door-to-door service. If you run out of milk and pop to the corner shop you will pay more, but at least the store is conveniently located. Being on the Internet is like having access to your own cow. You have unlimited access to milk whenever you want. The middlemen, who distribute the products, can be dispensed with. But you pay nothing for this convenience.
Climbing mountains
That is the electronic dilemma. If you cannot charge for top service and convenience, how do you make money? At the moment, only leading websites, such as Yahoo and eBay are making decent incomes by attracting huge volumes of users. These myriad eyeballs in turn mean advertisers fight for space on these popular websites, keen to sell their wares to this wide audience.
Making money by other methods on the Internet is at the moment, for both managers and investors, like standing at the foot of a great mountain, wondering how best to climb this peak. Because the culture has changed, this is uncharted territory with no proven way of getting to the top, other than via advertising support.
Where Next?
Tell us how to make money on the Internet. Go to the Fool's Eye View discussion board, via the resources section below.
Last night's Rule Shaker: e-Commerce: a Shopper Reports
US Fool's coverage of the Napster case: Someone's gonna pay; Napster Unplugged; The Ballad of Napster; Does Napster Herald the Dark Ages?