The internet has caused something of a minor revolution in this
industry. Not a week goes by without the business pages singing the
praises of some start-up attempting to make a fortune online, or
reporting the staggering rise in share prices of a particular e-commerce
In the past week alone we have seen Dixons announce the flotation of
Freeserve while Lastminute.com, a loss-making, seven-month-old business,
received funding valuing the company at pounds 18.6m.
But when we look beyond the hype generated by these internet brands do
they warrant the valuations being given to them? Sceptics would suggest
that if most of the brands born on the internet were wiped off the face
of the earth tomorrow hardly anyone would remember them by next
And if brands established on the internet cannot compete with their
offline counterparts on an equal footing, all the hype about the
internet as the next big thing starts to look like a case of the
emperor’s new clothes.
This is particularly true when the likes of Yahoo! and Amazon.com have
what look suspiciously like over-inflated stock values, considering the
losses they make.
Building a reputation
According to Simon Murdoch, managing director of Amazon.co.uk (the
internet bookseller’s UK operation) online brands will be able to rival
offline ones - but not yet. ’It’s just a matter of time,’ he says.
’A key element of the Amazon brand is to build trust. You can’t build up
trust by just saying to people ’trust us’. You have to build up the
brand by executing that. The most important part of building a brand is
word of mouth: hundreds of thousands of customers telling other people
that it really works.
’We make sure everyone in the company knows that the customer experience
is paramount. You can only build up that sort of trust and reputation
over time. Maybe internet brands haven’t done it yet, but Amazon has
only been around for four years, and only launched in Europe in October
last year. I’m sure you could do some research to show that right now
offline brands do have more of a reputation, and a different quality of
reputation from online ones. But over time internet brands will match
Charles Walker, UK managing director of internet portal operator Lycos,
believes that if internet brands have not caught up already, they will
do so soon.
’I think the strength of internet brands is still moot,’ he says.
’Certainly in two years, and maybe in a year, there won’t be any
argument that internet brands are powerful in their own right. The
penetration is huge - there are over ten million internet users in the
UK - and the growth is accelerating, especially with the launch of all
the free internet service providers.
When people go onto those ISPs and search the internet, it’s brands like
ours that they see, and come to know and trust.’
Perhaps internet brands are being judged not so much by different
standards compared with their offline equivalents, but by a more
generous interpretation of the same standards. This is a medium which,
in the UK alone, has gone from a standing start to more than ten million
in less than five years.
The internet may not be different in kind from other media, but it is
very different in terms of its rate of growth.
To continue with the Amazon example, Amazon could be profitable tomorrow
if it wanted. The company could slash its marketing spend, reduce its
cost base and coin it in. But it chooses not to. Amazon is investing in
marketing, and also in real estate - the online equivalent of buying up
stores. Every time Amazon does another deal to become an exclusive book
supplier to a huge web site it locks out potential competitors from
reaching that site’s audience. And while the seven- and eight-figure
sums paid in these deals might seem a bit steep now, they are peanuts
compared with what might be expected in a couple of years’ time.
’It’s about building both a customer database and a lasting relationship
with customers,’ says Amazon spokeswoman Judith Catton. ’We’re investing
a lot in marketing, people and customer service, because they’re the
absolute core of our business.’
The strategy is working. Despite the best efforts of rivals such as
German media group Bertelsmann’s BOL, Amazon is still knocking all the
other online book retailers into a cocked hat.
Even if it costs Amazon pounds 50 to acquire each customer, it is worth
it if it can lock them into a cycle of convenience-driven repeat buying,
especially if the company moves into other markets. As Ross Sleight,
non-executive chairman of BMP interAction, puts it: ’Yahoo! isn’t a
search and directory service, it’s whatever it wants to be. It also
offers news, online shopping and stock quotes. Similarly, Amazon is not
just about selling books. It can sell anything, because what it has is
trust, which is the thing that defines branding.’
One of the common complaints about a company like Yahoo! is that it is
difficult to pin down exactly what it does. That may be because its
brand is about a set of attributes - trust, convenience and reliability
- and not about specific products.
Already Amazon, for instance, sells videos in the US and even operates
online auctions there. It will undoubtedly expand its range further on
both sides of the Atlantic. When it is not geared up to sell a
particular product itself it will partner with a company which is. It
wants to be front-of-mind for online shoppers. Its branding is about
trust, reliability, range, convenience and reasonable pricing. It has
already achieved that in the book market and should reap the rewards in
the future. This achievement has been made through massive spending, and
through making a loss.
Amazon’s stock market valuation invites cynicism, especially when set
alongside the company’s losses. The company lost dollars 162m (pounds
101m) over the three years to 1998, on total revenues of dollars 610m
(pounds 381m). Last year alone accounted for dollars 124m (pounds 77.5m)
of its losses. During the last quarter of 1998 its losses were 18.4% of
its sales, up from 16.4% a year earlier.
However, its stock price has been upwardly mobile with occasional
panicky lurches downwards. At the time of writing its shares were
trading at dollars 118.75.
A year ago they traded at dollars 14, seven months later they had risen
to just under dollars 200. Then they fell to less than dollars 90 by
mid-February and then rose to more than dollars 220 by late April -
Even at the current relatively low level, however, Amazon’s total share
value is higher than the combined value of every other book retailer in
the US. According to The Economist, ’it would take average annual
profits of over dollars 1bn to make sense of Amazon’s current dollars
20bn-odd market value.
Yet Amazon’s total sales in 1998 were only dollars 600m (pounds
Amazon’s share price reflects the market expectations of the
These expectations have been fuelled by those of the medium itself, but
also by the branding promise being made by Amazon.
Building up a brand exclusively online can be difficult and a rising
number are turning to traditional media to promote themselves. ’At
first, most of our marketing was online,’ says Amazon’s Murdoch.
’Now we do press and radio in Britain, and TV in the US. The same will
happen in Europe as companies expand the reach of their marketing. We
have to reach people offline who might be thinking about taking out a
free internet subscription.’
In many ways it is a two-pronged approach: advertising and promoting to
consumers already using the medium and using the branding to encourage
consumers onto the medium in the first place.
Iliane Van Ees, UK marketing manager for Yahoo! and an ex-FMCG marketer,
is convinced that, to build strong brands, internet companies have to
market themselves in exactly the same way as anyone else would.
’Our advertising is very similar to ads for traditional products,’ she
says. ’I used to work at Procter & Gamble and our ads would involve a
problem being set up, a side-by-side demo, the problem being resolved,
the consumer looking happy, and then pack shot, pack shot, pack
Yahoo’s ads show someone who has a need - a guy fishing, say - he
searches on Yahoo! and then suddenly he catches the biggest fish in the
’The point is anyone can find anything they want on Yahoo! We even have
a slogan - ’Do You Yahoo?’ - which has no meaning in itself, but which
has the effect of turning the brand name into a verb.
’The key thing is what makes a brand and how you feel about a brand. A
lot of what is unique is intangible - how consumers feel about the
brand. In the US Yahoo! has managed to become a mega-brand, even among
people who don’t use the internet.’
If internet-founded brands face this kind of uphill struggle to place
themselves on an equal footing with established brands, the suspicion is
that they are feeble things, just waiting to be swept away when
real-world brands turn their might to the web.
But that is not necessarily true. Services like Amazon and BOL are far
more successful at selling books online than WH Smith or
AOL competes quite nicely with Virgin Net and there are no offline
players in the search directory-portal space occupied by Yahoo!, Excite,
Lycos and so on. They all perform services that people want, and if
offline players fail to do the business then online counterparts will
become powerful brands.
’The fact that you have a strong brand offline is no guarantee that
you’ll have one online, as a lot of UK companies have learned,’ says
’They’ve thought they can just stick up a site with their name on it and
sell online and reach all their e-commerce targets, but they’ve failed
because they haven’t partnered with the right online brands.’
When The Sun launched online in April, it went as far as actively
distancing its internet access-and-content service from the newspaper by
creating CurrantBun.com as a new brand. According to the service’s
general manager Ellis Watson, the semi-detached nature of the brand -
both allied to The Sun and separate from it - is its greatest
’CurrantBun is a totally new brand that means everything to Sun
readers,’ he says. ’To non-Sun readers, it’s as appropriate to them as
Freeserve or whatever. To them, it has nothing to do with The Sun. I get
e-mails every day saying: ’We love CurrantBun, but why is The Sun all
For The Sun to move onto the internet in such a committed fashion was
seen as highly questionable by some. After all, the paper’s core
audience is very mainstream, and skewed toward older people and less
affluent social groups, while the internet is renowned as a haven for
young, technologically-literate ABC1s.
Watson is undeterred. ’We have a self-defining target audience,’ he
’People who read The Sun or who go to Asda and pick up one of our disks
are interested in it by definition. Anyway, you can’t define the
internet audience in the same way as you can’t define, say, who it is
that uses mobile phones.’
Trying to define the average internet user is about as much use as
trying to define the average person. What is true is that the internet
audience is becoming more mainstream. Increasingly, demographics are
there to allow effective mass-market branding.
Largely because of the free internet service providers, which have been
successful in encouraging less techno-savvy consumers to give the
internet a try, there are now 11.6 million regular internet users in the
UK, according to Continental Research’s 1998-99 ’Internet Report’. That
is 25% of the country’s adult population and the report claims the
figure doubled between 1996 and 1998. Dixons’ Freeserve alone has more
than a million customers.
The skew toward young, male ABC1s living in London is also a lot less
pronounced than it used to be.
The internet audience in the UK is becoming larger and more
Continental Research estimates a 62-38 male-to-female gender split.
Fletcher Research puts the gender split among the 18 to 24 and under-18
age groups at 53-47 and 51-49 respectively, implying that in the future
the online population as a whole will move toward a 50-50 gender
Fletcher also reckons on an average age for the British user of 33. The
company claims 21% of UK users are between 18 and 24, 27% between 25 and
34, and 31% between 35 and 49.
The company also claims that 27% of UK internet users are in the London
and the south-east TV region, compared with 19% of the population as a
whole. Internet use in most other regions is roughly in line with
The ABC1 skew is still there, however. According to Continental
Research, 74% of internet users are ABC1s, compared with around 50% of
the population as a whole. As CurrantBun’s Watson points out, it is
possible to create your own demographic online, as Freeserve has done:
40% of its customers are first-time internet users. At the moment very
few British companies have chosen to do so and nearly all the biggest
internet brands are American.
As to whether they are overvalued and whether they have any lasting
real-world branding significance, only time will tell.
Richard Lord is deputy editor of Revolution magazine
Comparing on and offline brands
Net world Market cap Real world Market cap
America Online dollars 149.8bn Pfizer dollars 149.8bn
Yahoo! dollars 34.5bn Allied Signal dollars 34.5bn
Amazon.com dollars 23.0bn Alcoa dollars 23.0bn
Priceline.com dollars 17.9bn FeDex dollars 17.9bn
Excite dollars 8.4bn Mattel dollars 8.0bn
Realnetworks dollars 5.7bn Toys ’R’ Us dollars 5.5bn
Source: Fortune June 7 1999/Maturity marketing