Analysis of the Internet Software and Services Industry BE 530 Course Project Winter 2012 Tingting Xu Introduction The industry I have chosen for this project is the Internet Software & Services. Companies in the Internet Software and Services Industry develop and market internet software and provide internet services including online databases and interactive services, web address registration services, database construction, and internet design services, to name a few Information Technology is currently one of the largest ten sectors in S&P 500 with a sector weight of 17%. See fig. 1) Fig. 1 The Information Technology Sector is split into three industry groups: software and service(39. 14%); technological hardware and equipment(44. 9%); the semiconductors and semiconductor equipment (12. 79%). Fig. 2 Info Tec Industry Croup Weights The IT industry dominating firms include eBay, Google, Yahoo! and VeriSign, etc. While other firms play an import role in the industry, I would like to focus analyzing the above mentioned four companies for the purpose of this paper. Concentration
Within the IT sector, the Internet Software and Services Industry helps consumers and businesses realize and find services that are suitable for their needs. In order to do so, the companies in this particular industry develop and/or provide on-line databases and interactive services, web address registration services, database construction and internet design services, based on which the related applications are created and promoted. There are five major firms and some small firms in this industry. Although the history data shows that none of the five firms’ profits equal to zero in the past five years, the profits are business profit.
All we need to find is financial profit. The low barrier to enter the Internet Software and Services Industry make it a very open industry. The large number of new applications being offered by small start-up companies provides the best evidence for the low barrier. Hence, this industry is monopolistic competitive Technology is likely to be the most important factor for the Internet Software and Service Industry. This industry is constantly changing and improving itself, due to its fiercely competitive nature (John O’Shaughnessy & Maggie McRae Spring 2010).
But the threat bought in by new members is low, since it is difficulty for start-up companies to succeed in this industry. New companies cannot steal the market share from well established companies which have been in this market for a long time, hence very competitive. The government can affect Internet Software and Service Industry in a variety of ways. The most common way is government regulation. For example, the government could monitor activities on the Internet, which decreases the interest of using internet.
Government spending affects the development of the industry as well. The government could financially support the development of certain applications by some firms, making them the main player of the field. Financial Conditions Google has biggest market cap of 170. 17B. Its main revenue comes from providing online advertisement. For the six months ended 30 June, 2011, Google’s revenue increased 23% to $17. 60B, and its net income increased 12% to $4. 30B. The net income did not increase as much as revenue did because of an increase in the cost, and a decline of its sales.
Google has an increasing profit in the past5 years. (data from ychart. com) Google Inc. profit in 5 years Google Inc. profit chart in 5 years The second place is eBay with a 28. 67B market cap. eBay provides online platform, services and tools to help individuals and merchants globally to establish online and mobile commerce and payments. For the six months ended 30 June, 2011, eBay Inc. ‘s revenue increased 17% to $5. 31B. But its net income decreased 7% to $759. 3M. Marketplaces and payments segments are the contributors of the increased revenue.
The net income was partially offset by higher sales & marketing expenses, an increase in product development expenses, higher general & administrative expenses and higher amortization of acquired intangibles assets. During the 5 years under consideration, eBay has positive net income except for the 2007. (data from ycharts. com) eBay Inc. profit in 5 years VeriSign has a market cap of 4. 28B, which makes it the third place winner. The company provides domain name registry services and internet infrastructure services. For the six months ended June 30, 2011, VeriSign, Inc. ‘s revenue increased 11% to $371. M. But the net income decreased 57% to $34. 6M. Increasing in restructuring charges and higher interest expense, decreasing in operating income together contribute to the net income decreases. In the past five years, VeriSign’s net incomes are negative except the middle of 2010. (data from ychart. com) Verisign Inc. profit in 5 years The next is Yahoo! with a 616. 19M market cap. Yahoo! is a digital media company that provides advertisers engaging and canvases to connect with their target customers. For the six months ended 30 June 2011, Yahoo! Inc. ‘s revenue decreased 31% to $2. 44B.
Its net income decreased 14% to $460. 0M. The revenue decrease shows that the income from search segment decreased. The decrease in net income also comes from the fact that general & administration expenses increased, restructuring charges increased and lower gross profit and other income. Yahoo! had a negative net income starting from July 2008, ending in July 2009, at which time it turned into positive. (data from ychart. com) Yahoo! Inc. profit in 5 years Entry and Exit Barriers For Internet Software and Services Industry, the main cost players are the software technology and the employees.
It will save cost if a company product two products at the same, predicting there are economy of scale in this market. Location advantage tends to fade out in this industry because the product of the industry is produced using computers that can be equipped at any location. However, a place where high quality employees like to stay can be important. Although the industry is dominated by a few giants, new start-ups are common, supported by capitals chasing high returns, despite the low survival rate comparing to other industries.
While YouTube is a story of success when Google realized the popularity of on-line video sharing services and bought it for $1. 65B instead of creating from scratch its own on-line video sharing website, lots of other start-ups providing similar services are having hard times surviving or crashed without a trace when VeriSign provides a wide range of name registry services. The key for the survival of new player in an industry is to develop channels for product distribution.
In the Internet Software & Services Industry, new comers have the advantage of easier building of such channels, although developed giants still have more advantage in distribution. What is more, government regulations and legislature is also impact on the companies in the industry. The Digital Millennium Copyright Act (DMCA) of 1998 criminalized some cases of copyright infringement and prohibits the manufacture and distribution of services designed for the sole purpose of undermining technology used to protect copyrighted works (IBISWorld).
Product Differentiation Product differentiation can be separated into two dimensions, vertical and horizontal differentiation (Cremer and Thisse 1991). Vertical differentiation refers to offering a good in multiple versions each differing in size and price (Bhargava and Choudhary 2001). Horizontal differentiation refers to offering a good disjoint in parallel independent versions to address customers who request only specific parts (Weber 2008). The Internet Software and Service Industry have both dimensions.
The Internet Software and Service Industry are on the growth phase of the product life cycle. Growth companies prosper independent of the business cycle and enjoy fat profit margins (Hooke 89). According to the S & P 500 Index and the profit charts above, the revenue growth and profits over long periods of time remain promising. The favorite search engine, Google, is using perfect discrimination– The Automated Auction is the largest automated auction in the world automatically for the customer. Google’s customers sign up for Adwords, put in a maximum bid, then it will bid.
VeriSign SSL solutions product marketing manager Bob Angus said that “One simple tactics and execution techniques that help boost conversions include: adding the offer directly in the purchase path (your customer already has their wallet out), make the higher value product or service as the default purchase option, and always demonstrate that you’re a customer too by visibly using the same product/service that you are selling them. ” (David Hamilton on August 7, 2009) Today the Internet Software and Service Market are reversing the fixed pricing trend.
Increasing in computer technology makes it easier for sellers to use software to monitor the movements of customers on the website. New software products and services also increase consumers’ demand. As one industry observer noted, “We are moving toward a very sophisticated economy. It’s kind of an arms race between merchant technology and consumer technology. More so than in any other industry, unique opportunities for new technology products and services stem from the ability of IT businesses to build new offerings in combination with existing technologies.
This creates an unusual degree of interdependence among information technology products and services and, as a result, unique opportunities exist to encourage competition and innovation. ( Marco Iansiti, David Sarnoff Professor of Business Administration, Director of Research, Harvard Business School, June 15, 2009 ) Demand There are five factors that affect costumers’ demand, including price of the product, the costumers’ income, the tastes and preferences of consumers, the price of related goods, and the consumer’s expectations.
The negative relationship between the price of a product and costumers’ demand of the products is often referred to as The Law of Demand. Consumers want to buy more when price is low and less when the price is high. The income also affects the amount of a product consumers are willing and able to buy. For most goods, there is a positive relationship between a consumer’s income and the demand of costumers. In other words, when income raises, the demand for the product will increase; when income falls, the demand for the product will decrease.
For the Internet Software and Service Industry, the technology of product is the main factor that affects consumers’ demand. In other words, the tastes and preferences of consumers are an important determinant of the demand in this industry. For instance, one of the oldest product of Google, Pyra Labs, a weblog publishing platform, has a great demand as people finds it easier to create blogs, discuss and share knowledge and information. The price of related goods is also a factor that cannot be ignored. One relationship of two goods is complements, in which two goods are typically consumed together.
On the other hand, some products are considered to be substitutes for one another, like E-mail services provided by Google and Yahoo!. Customers can easily switch to a different service provider, which makes it difficult to charge customer even a low price for the service, if any at all. Consumers’ expectations for the future can also affect how much they are willing and able to buy. VeriSign announced that as of Jan. 15, 2012, the registry fee for . com domain names will increase from $7. 34 to $7. 85 and that the registry fee for . et domain names will increase from $4. 65 to $5. 11. Since global Internet usage grows and continues to be strong, VeriSign has dramatically increased the demands on Internet infrastructure. In the last five years, the volume of Domain Name System queries on VeriSign’s global Internet infrastructure has more than doubled, increasing to an average daily query load of 57 billion in the first quarter of 2011. It is not an easy task to identify substitute for all products in an industry as diverse as the Internet Software and Service Industry.
Obviously there are substitutes for individual applications: e-mails can be substituted by telephone, news programs can be substituted by newspapers and television programs, to name a couple. People can go shopping in-store instead of on eBay. But there are not all-encompassing substitute to take the place of all the products in this industry. Consumers are loyal to this market because of online services provide a well-organized, easy to use, and rather comprehensive service. All the various services that can be provided online are integrated into one application so that users can get support easily.
Conclusion The Internet Software and Service Industry, monopolistic competitive, is the fastest growing segment of the software industry. In short-term, economic profits encourage new companies to enter into the market. When economy goes downward, those firms can easily exit the industry since the fixed costs are low. In long run, the firms are making exactly zero economic profits. We therefore have an industry that is rather unpredictable, but it is also an industry that provides plenty of opportunities for both established software companies and new upstart companies.
References
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