Virtual communities: the benchmark for success online? The authors of Net Gain define the must-haves of a virtual community -- what are the implications for your business and Web site?

April  1997

In Net Gain, John Hagel and Arthur Armstrong define the ideal characteristics of a virtual community -- a presence in the online world -- and claim that fulfilling those characteristics is the surest way of attracting visitors to your Web site. Their model proves cogent and tantalizingly accurate; yet it has serious negative implications for many of today's biggest Web sites. The book makes for challenging reading, which it rewards by giving you tools to help you think about your business' place in the online world. (2,400 words)

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When is a Web site not a Web site? When it's a virtual community. This intriguing concept is the subject of Net Gain: Expanding Markets through Virtual Communities. This book is not about how to author HTML or set up an HTTP server; it's about how to define the right kind of destinations in cyberspace and what their business potential is. It answers questions about the ideal features of virtual communities, how to invest in them, grow them successfully, and reap financial rewards from them.

This book has serious business credentials: it is published by Harvard Business School Press, and its two authors, John Hagel and Arthur Armstrong, are consultants at McKinsey and Company, that Rolls-Royce of management consultancies. This makes it a very different kind of book, not only compared to the aforementioned how-to guides, but also compared to The One to One Future, the book I reviewed in last month's column, which is a brainstorming session on online marketing for small businesses.

The most successful aspect of Net Gain is its central theme, that of the virtual community. It's a good model for the principles they discuss throughout the book. A virtual community is a place in the online world where people and business entities who have some interest in common can gather and derive value. It's not just a Web site, nor is it an AOL or CompuServe forum. Hagel and Armstrong don't actually give an airtight definition; instead, they give a crisp list of characteristics that a virtual community must have. According to them, it must:

• Target some interest that will appeal to a sufficient number of people, such as travel, investing, Java programming, or beer.
• Allow members to form meaningful relationships with one another.
• Provide some forms of fantasy and entertainment.
• Support transactions that allow members to purchase or exchange things.

Think about these requirements: do you know of any Web site that satisfies all of them? There are very few. Certainly none of the mega-search sites (Yahoo, Excite, NetGuide Live, etc.) do. Time Warner's Pathfinder meets most of the requirements, but does so in a fragmented way because of the many different Time Warner content brands the site represents. I can think of two that come close: ESPN SportsZone, which includes fantasy sports leagues and the ZoneStore for purchasing sports memorabilia, and Microsoft Expedia, a comprehensive travel site within Microsoft Network.

The virtual community idea has much value in and of itself. It is a serious attempt at nailing down the characteristics of an online "presence" that will succeed and grow -- whether financially or simply in terms of number of loyal users. The online world, unlike the real world, is very flexible and openly definable. Therefore it's relatively easy to make of it what you want, barring an occasional technological hurdle. So what should you make of it? What are the characteristics of an ideal community that you would like to have in the real world but can't? The concept is that you can have these characteristics online.

Real-world approximations: stores and trade shows
Think about the above virtual community characteristics in relation to retail stores in the real world. Nowadays, as most consumer goods are becoming commoditized and it's possible to buy just about anything through mail-order catalogs, stores must do more to attract customers. As a result, the most modern stores fit most of the model above. Obviously, all stores fulfill the first requirement (interest) and the last one (transactions). Many clothing store chains satisfy the fantasy and entertainment requirement, like Polo (WASPy mens' club), Eddie Bauer (the great outdoors), and Warner Brothers (cartoon characters). Certainly, music and video stores supply lots of entertainment.

What's missing is the relationship requirement. Of course retail stores want a relationship with you, but -- as Hagel and Armstrong point out -- the more important relationships are those between customers. They go on to assert that an online presence cannot be successful without the intra-customer relationship component.

To put this in perspective, consider another real-world business entity that turns out to have more in common with a virtual community than a retail store does: the computer industry trade show. Trade shows are heavy on the "relationship" component. After you have been to your first couple of large shows, you are no longer impressed with keynote addresses by the usual suspects (Microsoft's Bill Gates, AOL's Steve Case, Sun Microsystems' Scott McNealy, Apple's Gil Amelio, etc.), and you learn that the true target of their remarks is the press, not you. No, you go to trade shows primarily to schmooze: to network, find out what's new, share some experiences, and see who's doing what.

You get fantasy and entertainment at trade shows in the form of cool demos, games and tchotchkes (that's Yiddish for "little giveaways or trinkets") at booths on the show floor, and the nightlife offered by the host city (often Las Vegas, Orlando, or San Francisco). The transaction component is not directly there, but instead is implicit in the form of deals made in "whisper suites" and at restaurant tables, and in business that results later from relationships forged at the conference.

Trade shows certainly are branded, just like retail stores. And the organizations that put them on (like Softbank Forums and the Blenheim Group, both of which, incidentally, have Web sites) make piles and piles of money from registration fees, show-floor booth rentals, advertising in show brochures, travel agency kickbacks, and other ways. If virtual communities are similar to trade shows, then it seems that the virtual community model does hold up as a way of making a lot of money from "content" that your customers generate.

Billboards on the information highway
The assertion that intra-customer relationships are important has serious implications for existing Web sites. First, and most obviously, it says that Web sites must be dynamic to be attractive. We all know this. Second, and more controversially, it says that member-generated content is more important than site-generated content, no matter how impressive, celebrity-filled, well written, well-presented, or branded the content is. This is sharply at odds with the big media companies, who preach "Content is King" in order to justify their own publishing efforts on the Web.

Hagel and Armstrong refute statements like the well-known snide remark by Michael Kinsley (the former New Republic magazine editor who is now in charge of the online magazine Slate on Microsoft Network): he said that people in a restaurant would prefer having their meal cooked by a professional chef than by the person sitting next to them. By disagreeing with that statement, Hagel and Armstrong infer that sites like Pathfinder, and those of newspapers like the New York Times and The Wall Street Journal, will not be successful.

Recent experience is proving them right. Pathfinder is losing money on a regular basis. The Wall Street Journal's Personal Journal interactive edition is getting some paid subscribers, but this is mainly because of "inertia" coupled with the price elasticity of the Journal's affluent audience; the number of subscribers is considerably lower than the Journal hoped for. And Kinsley's Slate magazine recently abandoned plans to begin charging for subscriptions.

The other strong implication of the "relationship" requirement is that the big search sites will not be successful either. Right now, search sites are able to make money by attracting advertisers, because their sites are very popular starting points for Web cruisers. But there are too many search sites now, with far too little to differentiate between them, so their ability to generate revenue is surely limited. Yahoo's recent unsuccessful stock offering bears this out.

Yahoo has started a print magazine, Yahoo Internet Life, to help create a brand for itself beyond the Web. Presumably, this will help Yahoo distinguish itself from the rest of that crowded field. At the same time, this segues neatly into another implication of Hagel and Armstrong's assertions: branding itself will become less and less important; virtual communities will erode brand values.

Their assertion is that, while site-generated content is important in the beginning stages of building a virtual community, member-generated content will eventually become more important than site-generated content. If you have branded content, then under these circumstances, it's harder to maintain the primacy of your brand. That may be a reason (apart from advertising revenue) why Yahoo started its print magazine: brands are stronger offline -- at least in publishing, where the intra-customer relationship component is hard to fit in. And, of course, even though Time Warner and The Wall Street Journal are losing money on their Web sites, they have premier brands that are far from dependent on the Web for their staying power.

In fact, you might even argue that the primary value of Web sites like Pathfinder is as a marketing tool -- a way of staking out visibility for a brand among Internet users, just as highway billboards and drive-time radio advertising stake out presence among car commuters -- rather than as a source of revenue per se. Hagel and Armstrong suggest that the online world is not a viable source of revenue for traditional publishers because their Web sites are not full-fledged virtual communities.

Unfortunately, the powers that be at these media giants insist on measuring the success of their Web sites in terms of revenue, not in terms of their success as billboards on the information highway. This means (again, if you believe the authors' model) that these Web sites will have to either scale back their efforts and/or expectations, or somehow try to become true virtual communities by adding much more user-generated content. It is difficult to see how they can do that.

Cut the consultant-ese. Where are the real-life case studies?
The virtual community model, as I said, is quite intriguing by itself. In Net Gain, the authors use it as the basis for their strategies for making money on the 'Net. They apply what appear to be business models from their vast McKinsey and B-school repertoires. One of them is the so-called increasing returns model, which can be summarized as, "The more money you make, the more money you make," a la Bill Gates. Their argument goes something like this: the online world is an increasing-returns market. Therefore, if you get past some initial hurdles, your business will grow, and it will do so in ways you can't possibly know in advance. Up-front costs -- including technology -- will be minimal. Therefore, you should invest in an online presence that makes sense and not worry so much about what's going to happen after the initial investment.

Although they do not explicitly target a certain type of reader, their discussion should come in handy to an eager young underling at a major corporation who wants to pitch a Web site project to senior management. The increasing-returns argument says that, unlike in traditional business plans, it's not necessary or feasible to try to predetermine exact costs and revenues from an online venture. You just have to take the initial plunge and have some faith. In other words, Mr. Senior Executive, throw me a couple of hundred thousand bucks, let me do my stuff, and don't worry that I haven't put together a precise business plan that accounts for every penny over the next five years.

With this argument, and others like it, our hot-wired underling has plenty of evidence to support the viability of his Web site endeavor. It's written by that most unimpeachable of sources: two McKinsey consultants, in a book published by HBS Press. It is also written in the style typical of that publisher: a dense forest of consultant-ese sludge.

That is the major drawback to this book: it takes considerable effort to get through it. It almost seems as though the book was written to be a credential-providing artifact for the authors and their firm - an item on their resumes, if you will -- rather than as an actual book meant to be readable to people who are thinking of putting up a Web site.

The other problem is that these authors let their impressive-sounding models get in the way of the book's structure. Apart from the central -- and cogent -- virtual community theme, each chapter in this book seems to have another sub-model that provides a different slant on the online world. For example, they delve deeply into speculation about how virtual communities start (small, narrowly-targeted, relatively content-poor), how they will grow (into larger and broader agglomerations), and how they will eventually bring revenue to their operators. Nice model, but what's the point? That www.skateboarding.com will need to become www.outdoor-recreational-activity.com to attract more visitors and thus enjoy more revenue? Doesn't seem like a revelation. The authors seem to place a higher value on the elegance of these models than on their practical meaning. They also hardly support their models with any real-life case studies.

The overall effect of Net Gain is fairly typical of books written by elite management consultants: its ultimate message is, "We are extremely smart people who have done a lot of thinking about this subject, and we have come up with with many great ideas that we have implemented for major corporations. If you really want our help, hire us."

Clearly, Hagel and Armstrong have done a lot of thinking. Their ideas are often creative and intriguing, despite the thick language in which they are expressed. As is also usual for this type of book, the central and most attractive model -- in this case, that of the virtual community -- does not provide enough material for an entire book. It's a white paper, and a brilliant one at that. Unfortunately, big book publishers don't publish white papers. Read Net Gain for its virtual community model; feel free to skim through the other stuff. Then give yourself some time to think about the implications of this fascinating model for your business and its presence on the 'Net.

Resources

• Net Gain: Expanding Markets Through Virtual Communities
  http://www.amazon.com/exec/obidos/ISBN=0875847595/sunworldonlineA/
• Pathfinder
  http://pathfinder.com
• ESPN SportsZone
  http://espnet.sportszone.com/
• Microsoft Expedia
  http://www.expedia.com/daily/home/default.hts?
• Blenheim Group
  http://www.shownet.com/
• Softbank Forums
  http://www.sbexpos.com/
• Bill Rosenblatt's earlier Bookshelf
  /sunworldonline/common/swol-backissues-columns.html#bookshelf
• Bill Rosenblatt's Client/Server columns
  /sunworldonline/common/swol-backissues-columns.html#cs

About the author
Bill Rosenblatt is an enterprise IT architect at Sun Microsystems, where he specializes in media technology. Reach Bill at Bill.Rosenblatt@sunworld.com.

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URL: http://www.sunworld.com/swol-04-1997/swol-04-bookshelf.html
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