Thus far, Internet companies have been known primarily for racking up astonishing losses. But some Internet business models will work, explains Christopher Tucci, co-author of a new textbook on Internet business strategy.

Christopher Tucci, assistant professor of Entrepreneurship and Innovation at Stern, is co-author, with Allan Afuah of the University of Michigan, of a new textbook: Internet Business Models and Strategies: Text and Cases. Published in August by Irwin/McGraw-Hill, the book is the first geared toward MBA students that deals with Internet strategy. Last summer, Sternbusiness sat down with Tucci to discuss the lessons that can be learned from the last several tumultuous years in e-business.

SB: How did you get interested in the business aspects of the Internet?
CT: I’ve been working on Internet topics since I graduated from college, about twenty years ago. I started doing work in computer science research in California, and was very involved in working on Internet protocols. Then I got interested in the business aspects of how companies manage their research and development. And for my dissertation, in 1995-1996, I did one of the first academic surveys conducted over the Internet.

SB: What surprising or important conclusions emerge from these cases?
CT: First, it turns out that customer value is one of the most important components of the business model. Whoever you are, you’ve got to find something that customers love. A second point is, that if you’re a start-up, you should take care to locate your place in the value network. Managers shouldn’t just jump in and say that because the business-to-business area is exploding they’re going to start a B-to-B exchange. A third point is that the critical piece is sources of revenue. At this point, it is becoming obvious that the advertising model is not going to really sustain a huge number of businesses out there.

SB: Many Silicon Alley companies either depend on advertising or are involved in creating online advertising. How does this conclusion impact them?
CT: Online advertising is growing and is going to be around forever. So New York companies like DoubleClick, or 24/7, which are providing the technology and service for advertisers, will be around. The companies that are depending on advertising as their sole source of revenue will have a tougher time. If you look at the long-term trend, advertising prices have been declining for the last few years. And the massive companies – the AOLs and Yahoos – are always going to get a premium. But as soon as you drop off the list of the top few companies, it becomes very difficult to attract significant advertising revenues.

SB: Can we say that some of the models or modes of doing business on the Internet do work? Or don’t work?
CT: It’s still too early. In the book, we describe ten different segments. Some of them are getting harder and harder to enter. If I had to pick one that was going to be a tough business, it would be content aggregation. It’s not that there’s no way to make money in it, it is just that probably only the top companies are going to make money in the long run. Companies that deal in financial content and entertainment, and those that successfully add value are going to be around for a long time.

SB: Amazon.com set the tone for retailers: Offer low margins and great customer service, and spend lots on marketing. For a few years, the market seemed willing to ignore the fact that these goals created huge losses. Now, however, many e-tailers are suffering, financially and in the stockmarket. Has that business model been discredited?
CT: A lot of this was actually driven by AOL. Many years ago, when AOL blanketed the country with disks, critics said it was a lousy business plan, and they were spending too much on marketing. But in the meantime, they were building this powerful network. And in the end, they ended up making money and doing quite well. That encouraged people to think, I don’t want to miss out on an opportunity like that. So retailers that can build a network of reliable and loyal users might be in the game. As far as I’m concerned, the pure low-margin retailer that is simply going to compete on cost will have great difficulty. I think you’re going to see a lot of the smaller on-line retailers come and go.

SB: Aside from technology, what will help companies become profitable?
CT: What a lot of people have shown is that the complementary assets, when they are tightly held, can be a very powerful tool. Complementary assets could be your logistics, or your customer base, your brand or corporate reputation, or your existing network of bricks-and-mortar stores. Pure online companies must spend loads of money to build such complementary assets. Compare Barnes & Noble and Borders’ reaction to Amazon. Barnes & Noble really embraced the Internet, and began competing head-to-head by setting up barnesandnoble.com as a separate entity. The company has used its complementary assets – namely its brand name and network of stores – to help grow business at barnesandnoble.com. The two firms share advertising and promotions, and you can return books ordered from barnesandnoble.com at stores.

SB: Internet companies seem to change their business plans rather frequently. Is that a danger sign?
CT: It is true that online business plans evolve more quickly than in the manufacturing economy. When you build a plant, you have huge sunk costs, so once you’ve got it, you’re sort of stuck with it and you want to milk it in some ways. Online companies are less wedded to their original plans. Yahoo is an example of a company that has changed its value proposition quite a bit in terms of the specific products and services that it offers. And they’re making money on things other than advertising, such as auctions.

SB: One of the cases deals with iVillage, the New York-based network of women’s sites. The company recently announced it was getting out of its online retailing business, iBaby, about a year after acquiring it. Are such abrupt changes warning signs or good signs?
CT: iVillage is a great case, because they have this community, which is a real thing. But the problem is that its original advertising-supported model was not sustainable by itself. So they were looking for additional revenue sources. E-commerce was one idea. But competencies like order fulfillment and order taking were not necessarily what they knew best. And there’s nothing wrong with thinking something through, and saying, this isn’t going down the right road. The case also really shows the tension that once you’ve built up a community, it’s a sensitive issue how you manage these other revenue sources. How that transition is managed is what’s going to separate the successes from the has-beens.

SB: These days, the market isn’t placing a particularly high value on New York-based community Internet companies like iVillage and TheGlobe.com. Are there other ways for their managers to monetize their assets?
CT: It is possible that someone else might be able to monetize them better than they will. We’ve seen cases where large companies buy small companies with little or no revenues but large numbers of users because they think they can monetize them. America Online paid $300 million for ICQ, the company that created instant messaging technology. Excite@home acquired Bluemountain.com, a free online greeting card company, which also had no revenues. The time to make these transitions is when you’re flying high. If you wait too long, once the market sort of starts souring on your business plan, it becomes more difficult.

SB: Some of the cases in your textbook are written by students. How would you rate their level of interest in and sophistication about how these companies work?
CT: It’s phenomenal. The cases are very high quality. We have a case series here in the Berkley Center, and we’re making these cases that the students have written – I probably have 40 or 50 – available for use inside and outside Stern. And it gives us a nice base of up-to-date high-tech cases.

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Christopher Tucci is assistant professor of entrepreneurship, innovation, & operations management at Stern.