4/15/2011

INDUSTRY
ANALYSIS
ONLINE COMMUNICATION

VINOD GUPTA SCHOOL OF MANAGEMENT | IIT KHARAGPUR

Contents
Introduction ...................................................................................................................................... 3
Major Players .................................................................................................................................... 3
Business Models ................................................................................................................................ 3
Gmail............................................................................................................................................. 3
Yahoo ............................................................................................................................................ 4
Windows Live ................................................................................................................................ 4
Skype............................................................................................................................................. 4
OoVoo ........................................................................................................................................... 5
Digsby ........................................................................................................................................... 5
Meebo........................................................................................................................................... 5
PEST Analysis..................................................................................................................................... 6
Political ......................................................................................................................................... 6
Economic ....................................................................................................................................... 7
Social ............................................................................................................................................. 7
Legal .............................................................................................................................................. 8
Technological ................................................................................................................................ 9
Porter Five Forces Analysis .............................................................................................................. 11
Rivalry among Existing Firms........................................................................................................ 11
Threat of New Entrants................................................................................................................ 11
Determinants of Buyer Power...................................................................................................... 12
Threat of Substitute Product ........................................................................................................ 12
Determinants of Supplier Power .................................................................................................. 12
Opportunities and Threats ............................................................................................................... 13
Opportunities .............................................................................................................................. 13
Threats ........................................................................................................................................ 13
Business Communication................................................................................................................. 14
The India Story ................................................................................................................................ 15
Future Trends .................................................................................................................................. 15
Entry into Webmail ......................................................................................................................... 17
References……………………………………………………………………………………………………………………………………….18
Introduction
The Online Communication Industry is a multibillion dollar industry with one of the fastest adoption
rates in the world. With about 1.88 billion user accounts in about 15 years, online communication
behaves almost like a mature industry where there is an aggregation of big players. 294 billion
emails are sent each day presenting an immense opportunity to the marketer. 13.4 billion dollars
were spent on direct email in 2010 in US alone which generated a return of $583 billion. The high
frequency of return, regularity of visits and the volume of traffic make mail and chat sites important
for advertisers even when the click rates are less than 1%.

The Online Communication industry is composed of E-Mail, Chat and Aggregators. E-Mail is the
oldest and is widely adopted for official communication also. Chat is more instantaneous but
requires presence of both parties simultaneously for communication. Chat has moved from text t
voice and video based applications. Voice over IP players are also included in this category which can
be used for calls over the internet or to other phones depending on regulatory compliance.
Aggregators enable the handling of multiple Mail/Chat clients with a single login to the application.

Major Players

Business Models

Gmail
Gmail business model is based on targeted ads placed in the Gmail page using an automated email
scanning system. This is a form of paid search, and under this system users see ads relevant to the
contents of the email they are viewing. It provides free storage up to about 7.5 GB.

Gmail had revenue per 1,000 page views of 6 cents in 2005 which increased to about 30 cents in
2009. The click rate of ads in Gmail is only about 0.1% as against about 8% in Google Search. This
shows that customers are more focussed on content rather than advertisements even when they are
targeted. Gmail revenues are not disclosed separately but the contribution of Gmail in Google’s total
revenues is about 1%. Gmail but serves a more important purpose as a launch-pad for most other
Google applications.
Ref: www.trefis.com :Analyzing a product’s impact on the company’s share price (20 Mar 2011)

Yahoo
Yahoo! provides Internet communication services such as Yahoo! Messenger and Yahoo! Mail.
Yahoo's webmail services are earning revenue by selling premium email accounts and
advertisements. It charges $19.99 per year for premium accounts. Yahoo messenger does not collect
charges for making calls from PC to PC; however it does collect charges when a call is made from PC
to a Phone.

Apart from calling charges Yahoo does generate its revenue from advertising. Owing to its strong
user base and strong brand equity Yahoo can sustain revenue from advertising with banner ads in
mails and messenger services.

Windows Live
It has the largest registered base of users majorly because it was the first robust system to provide
free email ids. Hotmail or “Windows Live” email collaborates with a large number of universities to
provide student email that is used for course registration, libraries, emergency notifications, class-
groups etc. Windows also sells premium accounts at $19.95 per year. Windows Live (Messenger +
Hotmail) earns $1/user/year.

Skype

Skype is currently the most popular VOIP provider with around 443 million user accounts. The user
can contact another user/ group of users through text chat, video chat or through video
conferencing. Skype generated around 620 million in revenues in 2009.

It is based on proprietary audio codec and proprietary protocol called as Skype protocol and can be
installed on a PC or in handheld devices such as I-Phone and Nokia N900 Skype operates on a
freemium model and currently the premium users cover all costs of operation of the free users. The
paid users make prepaid credit payments via internet. This whole system of pre paying through
internet reduces revenue collection cost for Skype.
Apart from calling charges Skype generates revenue from licensing from hardware vendors such as
Nokia. Another channel for revenue generation of Skype is through advertising, though at a small
scale now.

OoVoo
OoVoo is a considerably new entrant notable for its features. The video resolution is considered to
be higher than that of Skype which makes it more suitable for semi-official purposes also. ooVoo
conferencing software enables high quality video and audio calls with up to twelve locations at the
same time – six on video and six on phone; high resolution video and desktop sharing. Calls can also
be recorded in real-time.

Video Calls for up to 3 locations are free and up to 12 are paid. For premium users , Oovoo charges
Windows users $30 a month or a pay-per-use model. It also charges users for calls to phones and
desktop and activity sharing.

Digsby
Digsby instant messenger is totally ad-free and does not charge its users directly. It operates by
bundling optional applications with its installation package. Tech-savvy users may consider this
nothing more than an annoyance, but this practice preys on unsuspecting or less knowledgeable
users that click "Next" through every setup screen. They receive payments from these
toolbar/homepage/web crawler software providers whenever users install these products. The
approach is debatable but keeps it ad-free.

Meebo
They operate on Venture Capital Funding from Sequoia. It also uses an approach whereby it appends
ads to items that are shared via Meebo. Meebo runs advertisement in the form of multimedia
banner that can pop out to include video, surveys, or other information. Meebo has started running
these ads on the Meebo toolbars, splitting advertising revenue with partners. On Meebo.com ads
have an average of a one percent click-through rate Meebo also modifies its homepage to
accommodate ads.
 Meebo homepage featuring Toyota Prius advertisement

PEST Analysis

Political
Entry Restrictions
Countries like China have imposed restrictions on scrolling through webmail data by Google Yahoo,
etc. Most players have cooperated with the in implementing a system of internet censorship in
mainland China. Even though China does not officially ban Gmail, Google accuses Chinese
government of blocking Gmail and misleading Chinese customers to feel as if the error was from a
Google Server.

Unlike Google or Microsoft, which keep confidential records of its users outside mainland China,
Yahoo! stated that the company will not protect the privacy and confidentiality of its Chinese
customers from the authorities.

Ban on Particular Usernames

Yahoo landed in a controversy in 2006 as a result of banning all usernames with the string ‘allah’
contained in them. It also means that one could not register any username containing the string
“allah”, even if your real name contains the string, such as someone trying to register “Callahan” or
“Kallahar” Due to protests Yahoo! finally withdrew its decision.

Government Monitoring
Many federal governments have the authority off "wiretapping" private e-mails, social networking
Web sites and even transmissions from Blackberry telephones to monitor terrorist and criminal
activities. Many civic groups find the notion an egregious invasion of privacy on the part of the
government.

For example, US proposes to put forward new regulations that would affect American and foreign
companies that provide communications services inside the U.S. It would require service providers
to make the plain text of encrypted conversations - over the phone, computer or e-mail - readily
available to law enforcement, according to federal officials and analysts. Those affected by the
changes would include online services and networking sites such as Facebook and Skype, as well as
phone systems that deliver encrypted e-mail such as BlackBerry.

Economic
As the penetration of internet via mobile phones increases, communication sites are more
frequently accessed. This brings in a new trend for advertisers and revenue earning models also.
Large banner ads and pop-ups are the least preferred in mobile usage and advertisers attempt to
give their advertisements as integrated to the main content as possible.

Mobile Internet Usage in India

There is also another trend in developing economies where low end phones that can give internet
access open up the market to an entirely new segment of users. In India, Internet enabled phones
are as cheap as Rs. 3000 and this gives customers without a PC, quick access to the internet.

Social
Privacy
Many chat and webmail providers automatically scan e-mails to add context-sensitive
advertisements to them. Privacy advocates raises concerns that this gives rise to a security problem.
Allowing e-mail content to be read, even by a computer, raises the risk that the expectation of
privacy in e-mail will be reduced. For example, e-mail that non-subscribers choose to send to Gmail
accounts is scanned by Gmail as well, even though those senders never agreed to Gmail's terms of
service or privacy policy. Google can change its privacy policy unilaterally and Google is technically
able to cross-reference cookies across its information-rich product line to make dossiers on
individuals. However, most e-mail systems make use of server-side content scanning in order to
check for spam.
Privacy advocates also regard the lack of disclosed data retention and correlation policies as
problematic. Google has the ability to combine information contained in a person's e-mail messages
with information from Internet searches. Google has not confirmed how long such information is
kept or how it can be used. Gmail's privacy policy contains the clause: "residual copies of deleted
messages and accounts may take up to 60 days to be deleted from our active servers and may
remain in our offline backup systems". Google points out that Gmail adheres to most industry-wide
practices.

Sensitivity
Though most societies have accepted mail and chat as a part of Communication, it is not yet
perceived as a culturally sensitive method of communication. Etiquette prompts many personal
communications to be still carried over phone or in writing in non-official scenarios.

Critics also point out to the fact that companies inadvertently place ads without any consideration to
its content, seriousness or emotional impact. Google defends its position by citing their use of email-
scanning to the user's benefit. Google states that Gmail refrains from displaying ads next to
potentially sensitive messages such as those that mention tragedy, catastrophe, or death. They also
claim that all their advertisements are family safe.

Chat language is also frequently criticized by educations and others who hold to the view that it
affects purity of language and affects the learning especially in children.

Misuse of Video Chats and Chat-rooms

There is a widespread concern over media scrutiny relating to Internet child predators. Video chats
are frequently alleged to be used for pornographic purposes and chat-rooms that provide anonymity
also allow communication between strangers. The security threat in this case extends beyond the
virtual world and is almost impossible to track down.

In 2009, it was discovered that Yahoo!'s message boards were prone to a vulnerability that allowed
board participants to execute JavaScript on reader's computers as they searched the boards, which
could then be used to impersonate them online, even without their Yahoo! password. Yahoo! fixed
the vulnerability later.

Legal
Trademark Disputes
The domain names commonly used by communication websites could be unavailable in particular
countries. For example, gmail.com is unavailable in Germany due to trademark disputes, in which
cases users must use the domain googlemail.com.

Regulations
Many countries including India have regulations on online communication due to two major reasons:

 Loss of Revenues that the government incurs

 Security Issues
India has already asked all companies that provide encrypted communications to install servers in
the country to make it easier for the government to obtain users' data. That would likely affect
digital giants like Google and Skype, Blackberry etc.

Earlier, India even imposed a threat to ban BlackBerry service for at least two more months until RIM
agreed to give security officials "lawful access" to encrypted data. Indian officials have for some time
also been concerned about Google and Skype, neither of which maintains servers in India. Google
has an Indian unit, but Gmail is offered by Google Inc., a U.S. company subject to U.S. laws.
Luxembourg-based Skype has no India operations.

VOIP services pose challenges to regulators across the globe because of the disruptive nature of its
technology. Regulators are pressurized by Telecos against relaxing the VOIP norms. Another issue
with the VOIP service is non presence of a unified VOIP forum to put forward pressure on regulators.

The Regulatory authority – TRAI (DOT) does not permit the VOIP line to be terminated on any
landlines or mobiles in India. This restriction has therefore limited the VOIP to be used for PC 2PC or
for making International calls. However since January 2006 all telecom operators in India are
allowed to launch full fledged Internet Telephony.

Technological
The growth of mobile internet usage is the most important trend in driving communication sites.

In India communication sites are the most accessed in mobile phones also

Source: IMRB Research; 2010

Globally, mobile internet is considered to surpass PC usage by 2015 and earlier in developed
economies.
Outages and Uptime
Communication websites are expected to have near 100% uptime. Outages and data loss are
severely frowned upon in this industry. Most businesses experience at least one e-mail outage every
year and this downtime, combined with the recovery costs can add up to hundreds and even
thousands of dollars. Communication systems can stop functioning due to many reasons; and the
outages can be planned and unplanned.

Planned outages are these times when your e-mail system is down for maintenance or for an
upgrade. Patch management, moving the servers to a different datacenter, or simply bringing the
system down for tests can also be listed into this category.

Unlike planned e-mail downtime, unplanned outages are unprepared for and harder to pinpoint.
When such an issue occurs the causes can range from hardware or software problems as server
failures, connectivity loss and database corruption, direct attack or a human error which causes
system overload. Natural events and human accidents are not to be disregarded as well. this is one
major reason why business users don’t switch to generic mail applications.

Loss of Data
Storing of the actual email data includes physical storage, logical storage, archiving systems as well
as backup and recovery solutions. The biggest security threat to any email storage system is the
potential for mail data to be lost. Most organisations see this threat as existing in the datacentre and
spend many millions of pounds on securing it.

Security Threats
Security threats appear in the form of viruses, any other malware, spyware etc that can enter the
system due to the use of mail and chat.
Porter Five Forces Analysis

Rivalry among Existing Firms

Rivalry among existing firms can be considered very high. Though there are only 4 major players,
every one of them have a different strategy for growth and they are in different stages of web mail
life cycle. While Windows Live Hotmail has highest number of users there growth rate is negative.
Gmail is at 3rd position but the growth rate is very high. With this growth rate Gmail is expected to
supersede Windows Live Hotmail by year 2013.

Market Share of different Webmail Providers

Web Mail Provider Total No. of users Growth Rate

Windows Live Hotmail 364 Million -4%

Yahoo Mail 280 Million 11%

Gmail 193.3 Million 43%

AOL Mail 89 Million 19%

Comparison of different web mail providers can be found at the below link.
http://en.wikipedia.org/wiki/Comparison_of_webmail_providers

Threat of New Entrants

Threat of new entrants can be considered medium as Facebook is the only contender that currently
provides serious challenge.

Facebook

 Stickiness: The amount of time users spends on a site. Facebook stickiness quotient is
very high compared to other web sites as it provides many features at a single platform.

 Convergence: All communication on a single page: Chat, Photo and Video Upload, Email,
Social Networking.

 Trendy: Coolness quotient of facebook . Teenagers and young people are more inclined
to use facebook rather than Gmail or Yahoo Mail.
  Switching Cost to Buyers: Low if Facebook is considered; otherwise very high, Low exit
barrier, Time to market is very low.

Determinants of Buyer Power

Determinant of Buyer power can be considered very high as there is very low product
differentiation. Earlier People resisted changing email address, but with POP and Forwarding mails
to a different email address feature, people are now open to it.

 Total no. Of email users: 1400 Million

 Switching Cost: Moderate.
 Internet users uses more than one e-mail address
 Internet users threat of forward integration i.e. Facebook

Threat of Substitute Product

Threat of substitute product can be considered moderate. Social media has come a long way but still
it is not in the same league as email. However, for a normal user social media has become more
powerful than email. Normally People prefer to use social media for small bit of communication but
still they use emails for important or long communication e.g. twitter only provides 140 character to
express oneself which is a constraint.

 Substitute Products: Social Media (LinkedIn, Facebook, Twitter)

 Relative quality of substitute: security, Interface, convergence
 Switching cost to Internet users:
 Business Users: Very High
 Normal Users: Moderate

Source: Morgan and Stanley Research: 2009

Determinants of Supplier Power

Supplier power can be considered low in this case.
Opportunities and Threats

Opportunities

 Cloud Adoption : Collaboration applications such as email, chat, File Sharing on Cloud can be
next big opportunity for web mail providers.
 Promotional Email Delivery : Promotional mails can be directly delivered to priority Inbox.
This will help in increasing their revenue.
 Privacy Issues with Social Networks: This provide a huge opportunity for web mail providers.
Social Media has been always criticised for its privacy issues. Web mail provider can add
feature that enable to combine them best of both platforms.

Threats

 Outage time: Gmail remains more than 99.9% available to all users. This may not be
sufficient for business users who want to access their mails at all time and more over it leads
to insecurity.
 Security of email leaks: There are many cases of email leaks e.g. Bank of America email leaks.
This can lead to a very difficult situation for business organizations.
 Archive Maintenance

Electronic communications of some employees in financial services and medical-related businesses

are required by law to be archived for years, and data handled by those users must be secured.
Business Communication
Web-based e-mail is many a times cheaper and cost efficient than e-mail installed on-premise for
small businesses with up to 15,000 users.

Google Hosted Exchange Plan In House Exchange Plan

•$50 per user per year •$500 per month + $6 •$ 799 License
•$5,000/year per user per month •Hardware, Licenses,
•$13,200/year Anti-Spam, Routers,
Backup, Maintenance

On the basis of a survey of 53 enterprise-sized companies in both Europe and North America,
Forrester estimates that it costs a company $25.18 per user per month for an on-premise e-mail
system. This includes the cost of hardware, manpower and other costs associated with managing e-
mail in-house. On the other extreme, for a company making use of Google's fully Web-based Gmail,
it costs a mere $8.47. Microsoft Exchange Online, is midway costing $20.32 per user per month.

On-premise e-mail, has indirect costs apart from its initial installation and hardware costs. Some of
these are staffing required for the system, maintenance, storage costs, archiving and backup, mobile
access etc. Many of these are typically included in the per-user- per- month price of cloud-based e-
mail. Many enterprises use a hybrid of on-premise and external e-mail services.

For a firm with less than 100 users; per user per month costs

Even with the lower costs, firms may not switch to web based mail systems due to the following
reasons:

 Safety
 Backup
 Spam Protection
 Authentication, Encryption
 Reluctance to train employees who have grown used to Outlook
 Uptime

Google promises at least 99.9% uptime for its Premium customers. Nevertheless, it’s a leap of faith
for an organization and it may demand more safety requirements and privacy than an external
server.
The India Story
In India, like most South Asian countries, Gmail is the leader in the communication space. VOIP also
has not picked up as much as developed countries in India due to relatively slow internet
connections and cheap mobile phone rates. There is an emerging trend of using mobile internet and
it can be seen that the number of mobile internet users more than doubled from 2009 figures of 5
million to 11 million in 2010. The total internet access via PCs is also steadily growing in India and
was pegged at 52 million users in 2009. In 2010, some 11 billion ads were delivered, an increase of
more than 217% compared to 2010

90% of all Internet users in India use some form of mail or chat regularly. The major players in India
are:

Web Mail Provider Number of users Growth rate

Gmail 18 Million 23%

Yahoo Mail 16.8 Million 4%

Rediff mail 6.25 Million 4%

Windows Live mail 2.6 Million 10%

Future Trends
comScore,an US based research, shows in its research report “that in November 2010, the number
of visitors to web-based email sites declined 6 percent compared to the previous year, while email
engagement declined at an even greater rate. During the same time period, the number of users
accessing email via their mobile devices grew by 36 percent. While web-based email has witnessed a
decline over the past year, email usage via mobile devices has experienced significant growth, driven
largely by increased smartphone adoption. In November 2010, 70.1 million mobile users (30 percent
of all mobile subscribers) accessed email on their mobile, an increase of 36 percent from the
previous year. Daily usage of email showed an even greater increase growing 40 percent as 43.5
million users turned to their mobile devices on a nearly daily basis for their email communication
needs.”
In the figure, the large orange circle shows the total number of mobile phones and the smaller
circles, the number of users of each website. The intersection area shows the number of users
accessing the site from a mobile device. The mail systems already have more than one third of
mobile access whereas voice and Video applications like Skype is still more accessed from a PC.
AS the speed levels of internet increase in the mobile internet world and usage of 3G or higher
technologies gets popular, the overlap is bound to increase.

Some other expected future trends are:

 Voice chat and video chat on Social Networking

 Digitally signed Voice chat/Video Chat

 Extensive use of Video chat in Developing Nations

 Checkups via Video Chat e.g. Project Hope: Mobile E office in Rural New Mexico

 Use of remote stethoscope creates a digital audio file that can be saved and even
shared with the patient, so she, too, can hear what the doctor is listening to.

 Mobile Video Chat

 Virtual Reality during chatting

Entry into Webmail

As we can see from above analysis, it is very difficult to enter into this business. Innovation is the key
for entering into this business. The below mentioned reasons make it very difficult.

 Increasing sophistication big players provide

 Increasing trust on established players
 Small webmail players can no longer compete
 A good web-based user-interface is a onetime expense, but still small players can't
afford it
 Also, big storage quotas require losing money at least initially, and small players typically
don't have deep pockets to take that route.

Entry is possible mostly in niche areas or radically different product offerings. However, with the
increased internet penetration and innovation on the technology as well as innovation on the social
usage front will help in entering successfully.
References
1. Industry Trends - Morgan and Stanley Research Report :
http://www.scribd.com/doc/29850507/Internet-Trends-Mary-Meeker-04-12-2010
2. Forrester Research Report- Should Your Email Live In The Cloud? A Comparative
Cost Analysis; 2010
http://www.cio.com/article/474672/Gmail_vs._Traditional_E_Mail_Savings_Adding_
Up
3. http://www.buzzcity.com/l/The-BuzzCity-Report.pdf
4. Gartner Predictions for IT Usage 2010 and Ahead
5. IBM Systems Magazine ; Dr.Douglas J. Fiore: School Community Relations
6. Outlook Vs Gmail Cost : http://readymadeweb.com/2010/01/07/gmail-vs-outlook-the-
real-question-is-cost/
7. http://www.techrepublic.com/blog/hiner/google-apps-is-now-an-exchange-
replacement-users-can-even-keep-outlook/1794
8. Gmail: www.trefis.com :Analyzing a product’s impact on the company’s share price
(20 Mar 2011)
9. GMAIL, Yahoo http://www.techuser.net/webmail.html
10. VOIP:
http://knowledgefaber.com/index.php?option=com_content&view=article&id=43&Ite
mid=36
11. Meebo: http://venturebeat.com/2009/05/04/with-a-working-revenue-stream-meebo-
expands-on-the-web/
12. Digsby: http://lifehacker.com/#!5336382/digsby-joins-the-dark-side-uses-your-pc-to-
make-money
13. Mobile Internet: http://jess3.com/geosocial-universe/
14. Demographic analysis: http://indiacurrentaffairs.org/email-evolution-web-based-
email-shows-signs-of-decline-in-the-u-s-while-mobile-email-usage-on-the-rise/
15. India: http://www.internetworldstats.com/asia/in.htm
16. http://trak.in/tags/business/2010/04/07/internet-usage-india-report-2010/
17. Future : http://www.gartner.com/it/page.jsp?id=1278413
18. PEST Analysis: http://www.physorg.com/news202638788.html
19. Official Websites/About Pages of Gmail, YahooMail, HotMail, Skype, Meebo,
Digsby, Oovoo