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This is a really important distinction for any investor to make. You need to see the difference between the two…and so, a little parallel might make it easier to visualize who is who…..

There is a fundamental difference between the internet “applications”, and the internet “ad networks”. Internet applications are like hit TV shows. They draw in audiences who like the experience of the “show”.

Internet networks are like the TV networks (think ABC, NBC, CBS, Fox). They have developed serious business plans that know how to turn the audiences into money. The equivalent in the internet-world is Google, Yahoo, and Microsoft. These are the guys that have the ad delivery mechanism figured out. And, as a result, they shop around for newest applications that are drawing in a big crowd (such as Facebook, MySpace, and the like).

An internet application (like YouTube) is very similar to a TV show (like Friends, Seinfeld), in that they bring in viewers and attract an audience. So, like a TV show such as “Friends”, the producers, writers, directors of the show should not be particularly concerned with commercializing the show. They do not need to think about the business model, but rather they should focus on creating an excellent experience for the consumer.

Then, someone else (TV station, network) can come along, and figure out how to make money off of that audience.

But, where does a company like google fit in? They are like the TV networks of old…like ABC, NBC, CBS…in that they have the infrastructure in place to commercialize an audience. They have the advertising and the ability to wrap content in advertising. Google, Yahoo, MSN seem to be the big 3 of online advertising…and they are out there shopping for content that people want to watch, so they can wrap that content in advertising (just like what the big 3 TV networks do).

So, what is the implication to small start-ups…well, it means that (contrary to what your business school prof says), you do not really need a business plan, or any real plan for how your website is going to make money. You just need to develop a very user-friendly and necessary tool that millions of people will want to use on a daily basis (not easy to do all by itself). If you can do that…you have essentially come up with a hit TV show, and the big networks will compete to see who can buy you….think Facebook, MySpace, Twitter, etc….all of those internet based “companies” with valuations that business school profs scratch their heads trying to understand.

If you can start to think about internet “applications” as the TV shows (such as Friends, Lost, etc), and the internet “networks” as the TV networks (such as ABC,NBC, etc)…then it becomes much easier to understand which sites should have a business plan (networks) and which ones should not (the applications). Confusing these two concepts has led many a small company down the wrong path. If your goal is to develop the greatest TV show the world has ever seen (internet application), then focus just on that, and let the business guys (the networks) figure out how to make money off of your audience.

see also:

Valuations and internet companies

Venture Capital Method of Valuation

business valuation

Brian D. Butler Investment, Venture Capital, internet Brian D. Butler, Innovation, Investment, valuation, Venture Capital

It is interesting that the link between “Marketing” and “Operations” is closest in “services marketing”. Why? Because of the way in which services are “simultaneously produced and consumed”. In comparison to product manufacturers that can produce, store, ship and then deliver…a services marketing role will make the service new at the same time as they are delivering it. For this reason (lack of time between production and sales), it is essential that a services marketing operation delivers 100% quality the first time. While this might be easy in a small operation, it is increasingly difficult as the company reaches economies of scale. The challenge is to design the operating procedures so that the same level of high quality is delivered each and every time a customer is serviced. For this reason, the link between marketing and operations gets even closer in services.

Other operations issues to consider in services marketing:

1. How much capacity will you plan for? In services this issue is critical because of the nature of demand of the services industry. As compared to the manufacturing industry where extra goods can be produced in slow times (inventory) to sell to consumers when demand picks up…. in services marketing, there is no way to store inventory (an airline seat not used today can not be sold tomorrow). So, for this reason, the capacity planning issues are even more critical for services marketing than they are for manufacturing. This investment decision is complicated and should not be taken lightly.

2. Location selection issues are even more critical for services marketing. When making a capacity investment decision for services, you will need to locate your investment in fixed assets near to the location of your expected customers. The opposite of manufacturing occurs in services, where you first need to distribute your capacity, and then later you need to produce your product (service). For example, a company will first need to distribute hotel room capacity to all of the locations that consumers might want to sleep, and then they will need to sell the services. Or, a telephone service provider will need to first invest to have transmission capacity distributed to each neighborhood before they can offer the services. On the contrary, a manufacturing company will first produce the product and will worry later about how to distribute it to consumers (storing it as inventory, and selling it at a later date).

3. Services marketing needs to be ready for high volatility of demand for their services. Rush hour at lunch time for example. So, peak capacity will spike much higher than for manufacturing. So, services marketing operations needs to plan for this. Also, the amount of time it takes to service one customer varies from customer to customer…whereas a manufacturing operation can precisely plan how much time they will spend on each product produced. This extra variability makes it more difficult to plan for capacity requirements of services industries. As a result, many services industries plan the capacity in short horizons; ie scheduling the level of support staff needed to staff an event only at the last minute, calling up extra temp workers as needed

4. Capacity utilization directly effects the perceived service quality. In industries such as concerts… a full sold out stadium makes the whole experience better for each individual consumer, but other services industries such as airlines… a full capacity used (a completely full plane) makes other customers uncomfortable…and decreases the level of experience of each customer.

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Brian D. Butler Investment, Marketing, Operations, capacity Brian D. Butler, capacity, Investment, Marketing, Operations, services