traditional companies versus .com startups:

Copyright 1999 Morino Institute. All rights reserved. Edited for length and clarity.  

mary macpherson: introduction

Good morning. We are extremely fortunate to have Mary Modahl, Vice President of Research at Forrester Research with us this morning. Her research and consulting work in the Internet economy spans media, retail, financial services, consumer computers, networks, interactive software and business trade. She is the author of the soon to be published book, "Now or Never: How Companies Must Change To Win The Battle For Internet Consumers," and an influential and often-quoted analyst who has been profiled in The Wall Street Journal and Wired magazine. She has appeared as a guest on CBS, NPR, CNNfn and CNBC, and is a regularly featured speaker at company strategy sessions and industry events. During more than 10 years with Forrester, she directed the company's early research on computer networks and subsequently launched Forrester’s practices in new media and E-commerce. She graduated from Harvard University in 1983.

Every informed business person knows that the Internet is transforming the economy as we know it, but few people have the knowledge or the guts to identify which companies will emerge as winners and losers when the dust finally settles, and that's what Mary is going to talk about this morning. She has also offered to spend a few minutes talking about working with industry analysts, and I know that will be interesting.

The work that Forester has done on Technographics®—not to be confused with psychographics or demographics—can help netpreneurs understand Internet customers so you make business decisions accordingly. She will take us through that, and a number of other things you'll find most interesting. Following her presentation, Mary will be joined on stage by one of our favorite people—a trailblazer, groundbreaker, advisor, business leader, media maven and principal of the Poretz Group investor relations firm, Esther Smith, who will moderate your questions for Mary.

mary modahl: the sleepers awake

Thank you very much, Mary, and I'd also like to thank Esther Smith for inviting me to join you this morning. I'm honored to be with the Netpreneur Program, and I am very, very impressed. I think it's exceptional among the entrepreneurial groups that I have seen in various towns.

My presentation today is about the battle for Internet consumers, a battle that is being joined between traditional companies and .coms. When you look at the marketplace, you see the de facto assumption that the .coms have won this battle, that being a startup is much better—you are freer, you can move more quickly and are more exciting. Traditional companies are flat-footed. They are slow and their management doesn't get it. That's now conventional wisdom in our marketplace, but I believe that the market is beginning to shift. Traditional companies are not as DOA as they may appear.

This morning I want to focus on some of the responses traditional companies are making to the Internet. They know what's going on now, and they are beginning to take action. As a startup organization, how will that change your competition? I would submit that it's very different to be a startup in the Internet space today than it was three years ago.

The theme of my presentation is that traditional companies are responding, and that is changing the game for startup companies and .coms. We'll look at how, but first I want to look at Internet consumers. I think we all know about the movement from the early-adopter group into a more mainstream group, and I want to look at how the two are different. I will share with you some of the research that Forrester has done through more than 100,000 direct interviews with consumers this year. We will look at the battle between traditional players and startups or .coms. What are the advantages and disadvantages inherent in each? Which hand would you rather be playing? We will look at how traditional companies are responding. What are the successful models that you see in traditional companies? That's very important to have on your radar screen if you are a startup company. Finally, what are the implications for you if you are going to be competing against these traditional companies?

Let's start off with a look at consumers [slide 5]. We all know that when consumers, or anybody else, adopts any technology, there are first the early-adopters—those people who love technology and are willing to go through anything to try to use a new gizmo. Most likely, a lot of us in this room will do anything to get that hot new gizmo, even if it takes you more time and it's a big pain. Mainstream consumers follow after that, and, eventually, the laggards. How do these groups differ?

Let's look at early-adopters versus mainstream consumers, and here I'm talking about the North American population. Demographically [slide 6], the mainstream consumer group is bigger than the early-adopter group—88 million versus 60 million. They are far less male; it's a much more evenly balanced group with respect to gender. The median income is $35K per year in the mainstream consumer base, compared to $65K in the early-adopter group. That's a very important difference, obviously, because somebody who is earning half the income has a different set of needs when doing business online. However, the total personal disposable income of the two groups is almost the same. If your company is so out-there, so bleeding-edge, so .com-ish, so oriented toward early-adopters that you can't appeal to the mainstream, you are only addressing half the market compared to positioning your company as one that can deal with the needs of mainstream consumers.

Let's have a quick look at the data from a technology point of view. Early-adopters overwhelmingly own a PC while only half the mainstream does. Only 30% of the mainstream is online. Let me note that this data was gathered in the first quarter of 1999. These same people told us at that time that they expected to be going online in greater numbers, so the mainstream should be up closer to 40% by now. In the early-adopter group, we are probably reaching 80% today. It's moved fast during this year, and we'll go back out to the field in another month and see where they ended up.

There is a very big difference between the two groups in their online shopping behavior. You see early-adopters down at 19% They are expected to be up around 20%-25% by the end of this year. Mainstream consumers are much, much more hesitant about doing anything online—only about 7% have done online shopping.

Let's have a look at why. When we started to look at these markets to understand what consumers would do online, we realized that there's an essential problem in consumer markets. You can never go out and ask a consumer, "What will you do in the future?" It's like asking, "Would you like to land on Mars?" You get absolute garbage when you try to ask consumers what they will do in the future. You simply can't ask, "How would you use this new device that I'm describing to you?" We realized that we needed some kind of a predictive model, something that would tell us what the consumer is likely to do in a variety of markets. Demographics didn't work very well. We found out that you can't predict this technology behavior very well based on gender, age or income. For example, if you compare my best friend and me, we have completely different technology behaviors. She is a teacher. She is not into it, she doesn't like it, she won't touch it. Her husband uses it, but not her. We are identical demographically—same age, income, everything—so demographics doesn't help very much. Psychographics tends to help a little bit more; for example, is this person adventurous? We realized, however, that you needed some mechanism that specifically addresses a person's ability or desire to deal with or use technology, so Forrester created a classification system that we call Technographics which segments consumers based on their attitudes towards technology.

What you find is that some people like technology and some people don't. We call them optimists and pessimists. Overall, we find that optimists are far more likely to use any kind of technology than pessimists are, and the differences are much more dramatic when it comes to difficult-to-use technologies.

If you look, for example, at a fairly easy to use technology like a cell phone, there will be more similar behavior between optimists and pessimists than there is around a very difficult-to-use technology like a PC or shopping online. Optimists and pessimists are also divided into high- and low-income categories, because people who have a whole lot of money can spend more.

How does this map to our early-adopters, mainstream and laggard groups? [slide 7] What you see is that it is the high-income optimists who are the early-adopters. They love technology, they have money to spend and they are out there to do it. One of the most interesting "ahas" of this study is that the mainstream is actually composed of two groups, the low-income optimists and the high-income pessimists. That's very important because it tells us that in the mainstream consumer base about half of the people aren't buying much online because they don't have the income to do it. When you look more deeply into the data, you find that the low-income optimists are young people just starting out. They are highly educated, they're mostly single and, if you project forward their future, they are headed toward the high-income optimist category. They are going to marry up and turn into dual-income couples and their incomes are going to rise as they develop their careers.

That's so different from the high-income pessimist group which has plenty of income. In fact, their median income is up in the $65K range with the early-adopters. But you know what? They don't like technology. My dad is a guy like this. My dad is a high-income guy, but he doesn't like technology. He would not get an answering machine. He will not use any kind of voicemail. He absolutely detests it, and he won't get involved with technology at all. What's interesting, however, is that a high-income pessimist does sometimes go online and take action. When they do, they are difficult to tell from the optimist because they spend so much money.

Let's stick with the example of my dad. He doesn't like to go online. He doesn't browse or read news online and he is not interested in the Web at all. However, my dad is very interested in books. In fact, he translates—if you can believe this—ancient Greek into English as a hobby. Don't tell anyone about this, okay? He is kind of an intellectual guy.

One of his friends said, "Hey, Bill, did you know you can go online and buy all the books you ever dreamed of?" So he gets a PC, gets it set up, goes online and he's at Amazon.com. It's that easy. He doesn't even know there is any Web other than Amazon. The Web is just books to him. The first time he went online he spent $500 on books. He looks like an early-adopter, but is he? N-O-T, not. So, it's very important to understand the difference between these two groups in the mainstream because you have to decide how you are going to pitch your company to them.

Let's have a look at a couple of companies that have appealed to these two types of consumers. One that I want to bring out first for the pessimist area is Fidelity Investments, a traditional company.

Fidelity is marketing in a space where there are a lot of startup companies. E*trade is out there, Charles Schwab, and so many more. Fidelity has been reamed in the press for not being as fast in the day trading space. Their trading systems aren't as fast. Everybody has gotten all over them about it. But Fidelity looked at their customer base and realized that they had half high-income pessimists. What do these people really want? Familiarity. They need to feel comfortable because they don't really like technology. When a high-income pessimist gets online, it looks like the lunar landscape. It's so weird for them and they are so uncomfortable. All they're looking around for is something they are familiar with, and, thank heavens, Peter Lynch is here. [slide 9] I'm so glad to see you. This is a relief.

It's incredibly simple. You want to invest? Click on Peter. You want investment strategy? Click Peter. Return? Peter. It's very easy. They have understood that high-income mainstream consumers are not out to experiment, they are out to get familiarity.

How has Fidelity done? Very well. They manage over $200 billion in assets. E*Trade has $7.8 billion and Charles Schwab has $81 billion, so Fidelity is doing incredibly well. It is a traditional company, it is not hot and not winning the news stories, but it is doing very well by going after high-income pessimist consumers.

Now let's have a look at the low-income optimist group. These are our young folks. They like a lot of technology, but they don't have a lot of money. Let's look at a startup company that has done a good job of appealing to this group, theknot.com, a wedding site. The folks at theknot realized that young people who are technology optimists are living in a different world. I don't know about you, but when I got married, in the traditional kind of marriage model you would plan a hometown wedding, get together with your mom, choose some china, send those hand engraved invitations and all that stuff. There was a set of traditions around that. Young people today are in a very, very different kind of situation. For a start, the bride's parents are divorced, right? Her dad got remarried after leaving his second wife, and now the bride is closer to the second wife than she is even to her biological mom, and her dad's on to the third wife now. The groom's parents are probably divorced as well, and he is probably a different religion from the bride, so they have some fairly touchy etiquette questions when it comes to their wedding.

What do they do? Go to theknot [slide 12] and Carley is there to answer those etiquette questions that would have made Emily Post faint, such as: What do I do with my college lovers at my wedding? These are the true questions that we deal with today. Even the brand, the word "the knot," touches on the ethos of young people getting married. Over half of them have divorced parents, so their view of weddings and marriage is a little bit different.

The gift registry for theknot is very interesting—and I don't mean to position them as unique in this because there are certainly competitors that do it as well. In the traditional wedding model, the bride, primarily, would go out and choose the gifts, and the polite thing to do was to order them and send them to the bride's parents' home before the wedding. Traditionally that's the correct thing to do, but now the question comes up, which bride's parents' home? Besides, this couple would much rather take delivery of the gifts after they get back from the honeymoon, and theknot does that. They give the couple a set of pre-addressed, pre-stamped thank you notes. To us it might be very rude, even to just a slightly older generation, but to these kids it's obvious convenience. Moreover, they don't want traditional gifts. The last thing they want is china and silver. They like mountain bikes and things like that, but what they'd really like is for you to just make a deposit to their mortgage account [slide 13]. This is the ethos of young people today, and theknot has tapped it. These are the low-income optimists. They have a different feel to them than what you think of as the early-adopter consumer who is mainly a baby boomer.

How has theknot done? They are a startup. They had about a $1 million in 1998 revenue. I probably shouldn't be talking about them since they've just entered the process, but they have nearly a million unique visitors per month so they have done well on the startup side.

That's the consumer mainstream, with a startup and a traditional company that have done a good job of going after what those consumers are really looking for. Now let's have a look at the battle between these two types of companies, the .com and the traditional. Let's have a look at the hands these guys play. [slide 16]

First, in the funding area, I would argue that the .coms have a tremendous advantage over the traditionals, not least because they can get venture funding. Those venture capitalists are patient with the risk. They understand the kinds of expenditures that need to be made, and you don't even have to be profitable to go public. This is a magical, magical moment in the financing area. I'm not sure how long it will last, but for heaven's sake, it's a tremendous advantage over traditional companies that have to function through a traditional process that is a lot more risk-averse.

Leadership, I would argue, is a big advantage for .coms. Now, you may like to think it's because the IQ is very high among .com leaders, but I'm not sure there is a gigantic difference in smarts between traditional leaders and .com leaders. It's just that at the traditional companies only 1% of their business is on the Internet. If you are leading a company and you are focused on the 1% instead of the 99%, that's a mistake.

Since there's a real difficulty for traditional companies to get in focus, that's also reflected in the organization of the .coms. They're totally focused on the Internet. The traditional company, of course, can't be.

One of the biggest advantages of all for the .coms is channel conflict. Most traditional companies have distributors and retailers, and these guys aren't just a little bit difficult to deal with, they are unbelievably difficult for traditional companies to deal with. They threaten to pull your products off the shelves at retail. They threaten to stop distributing your products. They call up the president of the company. It's very bad. Anytime a startup can get in a position where it's selling direct against an indirect-selling traditional company, that's a real advantage.

Finally, I would argue that technology skills are an advantage for .coms. Again, it's not so much that .coms have better technology people—though in some cases they might, since they have the prospect of going public with which to compensate people—but as much as anything, it's the fact that the traditional companies are burdened with keeping up a huge number of internal desktop systems and human resources systems and payroll systems and financial accounting systems that are all internally focused.

But, and it's an important but, the traditional companies have some real advantages, and I will put brand in this category. People like you and me, the early-adopters, we look at companies like Amazon.com and Yahoo!, and those guys have done incredibly well with branding. We know of companies like Mercata, but mainstream consumers have no idea who most of these .com companies are. There is nowhere near the kind of brand equity that exists in a Victoria's Secret or a Wal-Mart. Among early adopters there is a willingness to try out new companies, but among mainstream consumers there's much less of a willingness to do that, particularly the high-income pessimist groups. Brand is a big advantage for traditional companies, if they use it.

The customer base is a big advantage with traditionals, their buying capacities in particular. They can say to a manufacturer or partner, "Hey, come and do this with me online."

Finally, physical presence should not be underestimated. When you walk down the street and see the signs for a company, you know they are real. While that has not been such a significant issue for the early-adopter, it is for the mainstream consumer. Seeing something physical in the world for the company with which you do business is important.

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