From Idea to Business (2) How to Estimate Your Income and Cost?

If you begin to think about expenses right after your income prospect, congratulations, your idea is one step closer to real business.

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[+] Pageview-based advertising income

As a matter of fact, your income and cost are known as soon as you get the most critical information: user number. With regard to income, the most important thing is the business mode: are you choosing advertising-based or subscription fee-based (e.g., VIP subscription fees or virtual items sales income) revenue model, or both?

The fact is, in some sectors, charging your users (e.g. white collars), would be very hard, while in other sectors, your users (e.g., blue collars) would be of high value in terms of fee charging, but little appeal to advertisers. It is hardly possible to develop both, particularly for highly sector-specific Web 2.0 sites.

What's more, there are often conflicts between catering for your users and your advertisers. Obviously, the later prefer large-size, eye-catching ads, while the former hate the disturbance of such ads. If you decide to cater for your advertisers, the possibility of charging your users would diminish, or vice versus.

Therefore, instead of rough estimation of the proportions of income from both modes, we might better start the process from the very beginning. First of all, we need to estimate the average pageviews per user each month. Then we could multiply it by the average user number to get the total pageviews of your website of the month.

For example, your website has 100,000 users as of April 30 and 140,000 as of May 31 (obviously, you get 40,000 new users in May), and you have 20 pageviews per user, then your total pageviews in May would be:

[ ( 100,000 + 140,000 ) / 2 ] x 20 = 2.4 million pageviews

If 80% of your webpages are used as the ads inventory of Google Adsense, or if you have a known click-through rate of 0.1%, you could easily get the total number of clicks each month. As the price of each click is no secret in the industry, you can easily get an estimate of your advertising income.

[+] Estimating the proportion of fee-based subscribers in total users

This advertising income is just a bottom line. If you are an Internet startup, and you do not have the budget to hire an ad sales person at this stage of business, or you have too few users to attract large advertisers, you have at least this amount of income. You could expect to launch ads at higher prices later when you grow big enough.

The key is: how to estimate pageviews per user per month? Similarly, it depends on whether your website is a tool site, or a content site, or a community site. Data for these sites are no secret in the Internet industry.

The total pageviews of different types of websites might be close, but they do have different meanings. A user might view only 2 web pages on a search engine, e.g., Google, but would come back a lot of times each day. For a community site, however, it is just the opposite.

Now let's discuss the possibility of charging your users. The simplest way is to divide your features into free ones and fee-based ones. For the later, you can offer different grades, such as platinum subscribers and diamond subscribers and charge them at different rates.

In this case, what you need to estimate is "the proportion of subscribers in total users". Generally, you should be satisfied with 3%. Then you should estimate "how much each subscriber spends per month". Multiply the two and you will be able to get your income from the subscribers each month.

As an Internet business operator, you would then begin to weigh how much resource you need to invest in your subscribers? Is it feasible to offer free contents and bet your income completely on ads? Why not increase your income by securing more users, since the proportion of subscribers is fixed? However, securing more users means more costs?

[+] The estimation of marketing and expenses

If you begin to think about expenses right after your income prospect, congratulations, your idea is one step closer to real business. In fact, the expenses of an Internet company usually include a few parts: marketing, bandwidth and others (including personnel and office expenses, which are beyond the scope of discussion here).

One cost-effective marketing approach might be to purchase ads from Google Adwords or some other ad networks. The best modes for startups are to charge by clicks or by results. Multiply your clicks by your conversion rate, and you would get your user number, and then a clear picture of how much you need to spend each month.

As to the bandwidth cost, the first thing you need to figure out is the total data volume your users would consume each month. Multiply the known pageviews per user per month by the average Kbytes per page, and then by the number of users per month, and the result is here (should be in GB).

ISPs offer two types of bandwidth prices. Perhaps we can explain them better with a comparison to water pipes and water volumes. You can either limit the total volume of water each month, e.g. to 120GBytes, or limit the diameter of the water pipe, e.g., to 1M Bits. The thinner your pipe is, the slower the speed.

How thick does your water pipe need to be? Let's make an example. Assuming that your total data volume is 120GB per month, of which, 45% take place in 10 given days, while 50% of the volume each day happen in 8 given hours. To be able to handle the peak volumes, you need an instant bandwidth of 0.768M Bits per second.

{ [ ( 120 x 45% / 10 ) x 50% ] / (8 x 60 x 60 ) } x 1024 x 8

The above estimation is for general HTML web pages. If you offer upload/download of a lot of photos or movies, that's another case. The method is still to calculate the data volume of average photo/movie upload/download per user. However, if you are not able to get particularly favorable prices from your ISP, it is highly possible that your business end up in failure.

[+] The development of strategies - right in these calculations

So much estimation, would that work? As a matter of fact, hardly any winner in the Internet community relies on such estimation for his/her business success. Sometimes, what's behind a successful business is sheer guts, which might be what's appealing to adventurers.

However, if you intend to mortgage your house or your car to start your business, instead of just giving your ideas or comments on your Blog, thinking about it a little more will do you no harm. Yes, you are a hero if you burn your money and succeed. What if you burn your money and end up in failure? (It depends on whose money it really is….uhm).

The Internet is a semi-traditional industry. Using the experience of others to do the calculation and to improve your chance of winning is, after all, rewarding. Just think more about the way to reduce your bandwidth cost, or stunning viral marketing skills to save cost, or raise more money in the initial stage for advertising. The development of strategies lies in these calculations. (
2007/07/22 - By Digitalwall.com - Way to
China Internet/Telecom )

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Prev : From Idea to Business (1) How to Estimate Your User Number?


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- Today in History

New Landscape in China's Telecom Market (7) The Pricing of 3G Value-added Services - 2008/07/27

New Landscape in China's Telecom Market (6) Insight into 3G Price War in Taiwan - 2008/07/20

From Idea to Business (2) How to Estimate Your Income and Cost? - 2007/07/22

New Era of Online Advertising (2) from Exposure to Deal - 2006/07/23

Ultimate Mobile Device (5) Universal User Experience - 2005/07/24

VoIP (2) Who Depends on Whom

The ball is always on the hand of telecom operators.

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[+] Feasible profit model of Skype

Where is Skype, a free VoIP service provider, going to make money? It's been a decade since the Internet revolution, nobody would be so naive to provide free service forever and depend on advertisements for revenue.

Will Skype charge monthly fees some day? Similarly, after a decade of the Internet revolution, nobody would be so naive to charge monthly fees for such a service. Anything that was once free would never be charged for, otherwise ICQ, MSN and Yahoo! would have done it years ago.

That leaves Skype only one thing to collect fees for: the phone call service between Skype and traditional PSTN. Consumers have formed their mindset that phone calls between computers are free. However, if you call a telephone number through a computer, you will have to pay - whether that's a local landline number or a mobile number.

For this reason, Skype has launched SkypeOut, which allows the users to dial conventional phone numbers and charges them fees by minute. Consumers buy pre-paid points on its website and make phone calls with those points. There is also a detailed list of tariff for the service on the website.

With such a profit model, Skype, far from being a challenger of the traditional telecom industry, has to depend on the latter for living at the current stage. Having understood this, you will see that the media has over-exaggerated the so-called VoIP "revolution".

[+] A complicated landscape in the telecom industry

In almost every country, telecom operators are classified into two types: Type I and Type II. Although telecom regulations of different countries have different definitions for the two terms, in general, the business scope of the Type I telecom operator mainly involves the distribution and construction of telecom infrastructures.

For example, fixed line telecom operators spend a lot of time and money in laying cables along roads and in mountain areas till they reach each household. On the other hand, mobile operators have to build their base stations and sell phone numbers to enable subscribers to make phone calls wherever they are.

There are various kinds of the Type II operator. They mainly provide value added services based on the infrastructures of the Type I operator. For example, the ADSL ISP is one of such operator, which includes, for instance, Seednet and Sonet in Taiwan, who provide the Internet access service via the landlines of Chunghwa Telecom.

An easier distinction between the two types of telecom operator is the fact that the Type I is able to provide the subscribers with phone numbers, while the other is not. If you install a fixed phone set at home, you will get a fixed phone number; if you use mobile services, you will get a mobile phone number then. All these numbers are allotted to the Type I operator by the government.

The Type I operator assign the numbers to subscribers, who can therefore make phone calls and will receive bills for that. The "product" that the telecom operator sells is the "minutes of a phone call". The rate for a "minute" sold to public consumers may be called "retail price".

The Type I operator may also sell large amount of "minutes" to the Type II operator, who, in turn, sells them to public consumers, and this kind of business is known as voice resale. Of course, the Type II operator could get the minutes with lower prices, which are called "wholesale price".

[+] Skype relies on wholesale minutes prices

For example, if the retail price that a Type I operator offers public consumers is 4 dollars per minute, and the wholesale price that it offers a Type II operator is 2 dollars per minute, the resale price offered by the Type II operator might be 3 dollars per minute to public consumers. In this case, the Type II operator would earn 1 dollar for each minute sold.

So we can often see many Type II operators selling phone cards with a rate even lower than that of the Type I operator. The reason is that the Type II operator can get minutes at the wholesale price from the Type I operator.

When a consumer makes a call through such a service, he/she must dial a given number first, enter his/her user ID and password, and then the actual phone number he/she wants to dial after an authentication process. When the call is connected, the person is actually talking with the other one via the phone line provided by a Type I operator. While the Type II operator sells the card, it is the Type I operator that actually connects the call.

With the Type I operator's retail price of 4/minute, isn't the Type II operator challenging back with its resale price of 3/minute? As a matter of fact, the Type I operator is not worried at all, because it believes that the wholesale of minute to the Type II can bring it more income.

And to be frank, the price that the Type II operator offers public consumers are completely controlled by the Type I operator. In order to maintain the market order, the Type I operator will not reduce its wholesale prices at will. It is the Type II operator that, due to severe competitions, often has to suffer a narrow margin.

[+] The ball is on the hand of telecom operators

SkypeOut can enable calls to conventional phone numbers only because it has negotiated a "wholesale" price with the telecom operator. As the telecom operator has sold the minutes to Skype at considerably cheap prices, Skype could charge its customers with a relative low price. Eventually, the money has fallen back into the pockets of the telecom operators.

Type I operators around the world are either unwilling, or not allowed to do businesses with Skype, forcing the latter to buy minutes from Type II operators. Although Skype could get wholesale prices for its large orders, its profit margin is even narrower after rounds of resale. The money eventually will fall back into the pockets of telecom operators.

VoIP is an inevitable trend. Yet the transition will be completed slowly under the control of telecom operators. In addition to the price, there're also the issues of numbers (Skype does not have a number and, therefore, cannot receive calls) and handset subsidies in the case of mobile communication. The ball is always on the hand of telecom operators. (
2004/12/05 - By Digitalwall.com - Way to
China Internet/Telecom )

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Prev : VoIP (1) It's a Fool Not to Make Telecom Money


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- Today in History

Mobile TV Market (3) Terminal Manufacturers & Content Providers - 2007/12/02

Great Future of Wireless Broadband (4) WiMax, 3G and 4G - 2006/12/03

Internet and Books (1) Dilemma of Online Publishing - 2005/12/04

VoIP (2) Who Depends on Whom - 2004/12/05

VoIP Gives out the First Cry - 2003/12/07

VoIP Gives out the First Cry

Who's whose value added service?

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VoIP (for phone calls through the IP-based broadband access) has been a hot subject in Taiwan's telecom market lately. Actually, a service to enable phone calls through the Internet to save money has been an attempt of many people since the beginning of the Internet.　

So far, most VoIP services have been enabled through computers. A user installs software in his/her computer, use it to dial a phone number and talk with the other party through a microphone and a speakerphone. Of course, the computer has to be connected to the Internet.

The one you call can be anyone with the same software program, or a conventional telephone number, or a mobile phone number, or you can even make a call to another country. To enable non-computer users to use the service, some operators have also introduced traditional telephone sets with built-in Internet access IDs, which allows VoIP calls without a computer.

Today's VoIP is even easier to use. ADSL subscribers could apply to subscribe the VoIP service to specific service providers, install a gateway (leased or bought) behind the ADSL modem, and connect the computer and the telephone, and then the user can dial VoIP phones.

Thanks to the low cost brought by the Internet, the phone toll fee is much cheaper. As ADSL infiltrates into more and more families and offices, the service is being increasingly recognized for its enormous potential. Particularly, as the profit margin of the ADSL service gets increasingly narrow, ADSL broadband ISPs are hoping to raise their revenues through VoIP service.

The success of VoIP in Japan seems to boost the confidence of broadband ISPs. Among the ADSL subscribers of the market leader Yahoo!BB, over 80% are VoIP users. By the end of May 2003, the number of VoIP users had exceeded two million. It is expected to reach 5.7 million by the end of this year all over Japan.

The reason of Yahoo!BB's success is the built-in gateway in the ADSL modem. ISP promotes the VoIP service whenever a subscriber applies to subscribe the ADSL service. Even if the subscriber does not want to subscribe the VoIP service right now, they could do it later when they want by activating the gateway inside the modem, without having to install a separate gateway..

A subscriber subscribe to the VoIP service will get a telephone number, which he/she can use to dial phone calls to other subscribers of the same service, which are treated as on-net calls. Of course, the number also allows calling conventional fixed line or mobile phones, as well as receiving phone calls, just in the way that a conventional phone is used.

Impacted by VoIP service of Yahoo!BB, the voice revenue of fixedline telecom operators in Japan drops by 20% in a year. To retain their subscribers, telecom operators in Japan are vying to introduce the VoIP service as well, which pushes up another surge of VoIP. On the other hand, the low fee rate is further driving down the revenue.

Imaginably, the service has created heavy pressures on traditional telecom operators. Witnessing VoIP's erosion into the revenue of conventional phone services, Chunghwa Telecom, which is the largest telecom operator in Taiwan, has been reluctant to enter this sector. Other fixed line operators, due to their inherent vulnerabilities, are even less willing to launch the service, which will eventually kill their golden goose.

Therefore, the ones most enthusiastic about this new service are Type II telecom operators. For example, SaveCom already introduced its VoIP service in the last year; Seednet is planning to launch its VoIP service at the end of this year. Taipei Computer Association (TCA) has even established an alliance with 10 Type II operators called IP Phone Open Exchange (IPOX) to launch the VoIP service with phone numbers headed by 070.

Traditionally, telecom operators have regarded the Internet access service as a value added service, as the phone line is used mainly to make phone calls and Internet accessing is considered as a secondary application. In addition, the revenue from the voice service has been always higher than that from the Internet service. Therefore, the Internet service has been considered as an accessory service to telephone.

As ADSL infiltrates into more homes and offices, and Internet accessing becomes an important application, the latter itself is generating a lot of value added services, for example, email, online gaming and audio/video playing, etc. What is interesting is that making phone calls has become a value added service to the Internet.

See the following figure for the concepts:

If a fast success could be achieved by VoIP, section C in the above figure would expand rapidly. As many families in Taiwan have ADSL lines, which indicates section B is already very large, it is highly possible that section C would grow fast.
However, we should not ignore another possibility. Currently, one reason for most families to subscribe new telephone lines is to use it as an ADSL connection to the Internet. The line is directly connected with their computer and never used to make phone calls. See the following figure:

If we compare the two figures, we can see that the expansion of section E in Figure 2 would make it easier to promote the VoIP service. This also explains the reason of Yahoo!BB's success in Japan. By binding VoIP with ADSL, it is able to expand section E rapidly.

Another thing that the figures tell us is that it is impossible in the foreseeable future for either section C or section E to outgrow section A, unless section D could outgrow section A, which is too big for any other section to outgrow at present.

Many families already have their telephones, some even have two or three. What makes you want to install another telephone at home? To save the phone bill might be a good reason. Otherwise, with today's saturation rate, the market would be hard for any players to access.

Currently, many VoIP operators in Taiwan are planning to introduce packages that allow free phone calls within the same network (the subscribers only have to pay the basic monthly fee), and lower fee rates for calls to conventional fixed line or mobile phone numbers. This is a destruction that the Internet has made to the old price structure, as well as a subject that all operators have to face seriously. (
2003/12/07 - By Digitalwall.com - Way to
China Internet/Telecom )

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- Today in History

Mobile TV Market (3) Terminal Manufacturers & Content Providers - 2007/12/02

Great Future of Wireless Broadband (4) WiMax, 3G and 4G - 2006/12/03

Internet and Books (1) Dilemma of Online Publishing - 2005/12/04

VoIP (2) Who Depends on Whom - 2004/12/05

VoIP Gives out the First Cry - 2003/12/07