Not so long ago, e-commerce alliances were being struck at an amazing pace: in 1999 alone, companies announced approximately 13,000 of them, from "bricks-and-clicks" partnerships between on- and off-line companies to deals between Internet portals and content or commerce companies (Exhibit 1). "Speed is everything" was the mantra of venture capitalists, entrepreneurs, and executives. And the stock market generally approved: fully 60 percent of the significant alliances announced in January and February 2000 raised the partners’ share prices more than expected. Old-fashioned business analysis became, well, old-fashioned.

But when, shortly thereafter, Internet stocks crashed, investors grew skeptical. Only 40 percent of the e-alliances announced from March to May 2000 got a positive reception. As one senior executive said, "The days of the ’Barney deal’—press releases announcing, ’I love you, you love me, we’re a happy family’—are over."

Are e-alliances a fad of the past? The answer is no; in fact, they are now more essential than ever. Speed and scale remain important in the Internet economy, and alliances are often a faster and less capital-intensive way to gain access to products, customers, and business capabilities than building them from scratch. Moreover, our assessment of the financial and strategic outcomes of hundreds of Internet alliances indicates that their overall success rate has been slightly higher than the rate of their traditional off-line counterparts: 55 percent against 51 percent.

But the stakes are now much higher, and the market has been less forgiving since last year’s market correction. In this new environment, how can chief executives of on- and off-line companies raise the odds that an alliance will succeed? To answer this question, we considered more than 700 deals announced from January 1997 to May 2000 (see sidebar, "About the research").

Our study examined the stock market effects and long-term outcomes of both business-to-business (B2B) and business-to-consumer (B2C) deals (Exhibit 2). Several striking patterns emerged. In consumer businesses, bricks-and-clicks deals, in which on- and off-line companies combine complementary assets, have been fairly successful for both partners. Meanwhile, deals between portals and pure-play Internet companies have generally worked well for the portals, which can reap the benefit of their valuable traffic. But until mid-1999, these deals worked less well for partners eager to tap into it.

In the B2B sphere, the first wave of alliances proved to be singularly unsuccessful. They ran into difficulties as a result of pitfalls that have been known for more than a decade: overambitious scope, a failure to contribute assets at the outset, and unworkable governance structures. Finally, though deals in the United States have commanded most of the attention, cross-border alliances have been reasonably successful. For companies that are strong in their home markets, such deals represent an attractive growth option.

Bricks-and-clicks alliances

At first, it was thought that on-line players would take value away from their off-line allies by stealing customers or cutting prices. In fact, value comes from integrating on- and off-line capabilities. Partnerships between bricks and clicks have turned out to be the most successful of the combinations that we studied: three out of five were well received by the market when they were announced, and three out of four have flourished so far (Exhibit 3).

This success reflects the complementary nature of each partner’s contribution. The market regards on-line companies as dynamic—a source of speed, new approaches to marketing, and additional customers. Yet the incumbents bring most of the assets: brands, products, distribution, supplier networks, customer relationships, and physical sites. As many dot-coms now painfully recognize, these things do count.

It is instructive to scan the Standard 100,¹ the top 100 Internet companies by market capitalization. Of the B2C companies on the list, only a few were profitable in their most recent fiscal year (generally 1999), and all of them—portals, integrated players, and pure-play companies alike—have used bricks-and-clicks deals as a core element of their strategy. Of the pure-play B2C companies on the list, only four—eBay, E*trade, RealNetworks, and Yahoo!—reported positive net income in 2000, and they are pursuing bricks-and-clicks deals. E*trade has a joint venture with Ernst & Young to offer financial advice via telephone and e-mail, for example, as well as an alliance with the US retailer Target to put E*trade "zones" in retail stores, while eBay has a partnership under which the automobile manufacturer Saturn inspects cars offered for sale on eBay.

On-line companies are not the sole drivers of such deals. Consider BlueLight.com, an e-retailer created through a partnership of Kmart, Yahoo!, Martha Stewart Living Omnimedia, and Softbank. In their joint venture, the partners capitalize on their respective assets: Kmart’s off-line customer base (85 percent of the population of the United States lives within 15 minutes of a Kmart store), Yahoo!’s on-line presence (more than 55 million unique visitors each month, according to Jupiter Media Metrix), Martha Stewart’s well-recognized brand and product assortment, and Softbank’s expertise in gaining access to capital and in building Internet businesses and global networks. By December 2000, BlueLight had attracted almost 6 million subscribers to its free Internet service provider, and in the same month more than 12 million shoppers visited the site.

Portals

The high overall success rate of B2C alliances actually masks some fairly disparate results: when on-line content or commerce companies have sought to team up with large Internet portals, the outcome has been less well-balanced. Portals have generally come out as long-term winners in these deals, though the market reacted with indifference when they were announced. But fewer than 30 percent of the portals’ content or commerce partners have achieved the financial or strategic objectives they sought, though the stock price of most of these companies went up at the announcement (Exhibit 4).

While troubling for content and commerce companies, this pattern isn’t surprising. Until recently, the stock market rewarded traffic. The announcement of a partnership with a portal—even a partnership involving high up-front payments— implied the promise of sharply increased traffic to the partner’s site. Many companies that were contemplating initial public offerings therefore entered into alliances with mega-portals for the sake of the future IPO, and publicly traded companies allied with one portal or another to support their growth expectations.

Often, however, these alliances were structurally flawed; the litany of problems includes poorly chosen partners, inequalities between the risks and the rewards for different parties, an absence of performance requirements or of metrics for assessing performance, and a failure to focus on implementation. Some companies also complained about paying portals for exclusivity only to find that it turned out to be narrower and less valuable than expected.

Despite the odds, some content and commerce companies have benefited from deals with portals. Their experience offers three lessons for others.

1. Use more science and less art: The Internet is a fast-moving and uncertain environment, and the crush of deals and a sense of urgency can rush deal makers into decisions. But an immense amount of real-time data can be brought to bear in weighing the terms, so it is disheartening to see that many deal makers rely primarily on internal data, anecdotal deal benchmarks, and assumptions. Outstanding deal makers, by contrast, take the time to analyze where their competitors and potential partners get visitors and customers. They benchmark their deals against others involving the partner and its industry peers. They improve on the deals of their competitors. Finally, they make regular efforts to find out whether they have met the conditions needed for success, such as market penetration or the total size of the market.
2. Bring a broad set of "currencies": Deals are enhanced when the partners combine traditional tangible assets and intangible ones, including (but not only) brands, relationships with other companies and with customers, and know-how. In a deal with America Online, for example, Target not only created a co-branded World Wide Web site and sponsored the shopping channel on AOL’s proprietary network but also contributed in-store kiosks in Target’s outlets, a powerful distribution channel for AOL, lists of customers, category-management skills, and products. An approach of this sort can help reduce cash outlays, increase a partner’s commitment, and ensure that all of the sources of value in a deal are exploited.2
3. Change the game: Content and commerce companies could try to rewrite the rules when dealing with portals—for instance, by considering a simple contractual relationship rather than a more committed partnership. Instead of paying a portal for premium placement on its Web pages, as competitors did, the on-line jewelry retailer Ice.com went to several sites and bought standard banner advertisements offering a free necklace to anyone who filled out a detailed marketing survey. In the end, the com-pany not only created a valuable marketing database but also paid less for the necklaces than it would have spent on a deal with a portal. Before pursuing such a deal, pure-play content and commerce companies should also consider allying with an off-line player.

B2B alliances

Almost half of the participants in B2B e-marketplaces and consortia were rewarded by positive "pops" in their stock price. But the steak hasn’t lived up to the sizzle: from the first wave of deals to the end of 1999, only 29 per-cent of the B2B alliances we assessed were on track to create value or met medium-term objectives such as liquidity targets. Many of these alliances were set up in record time but stumbled over three classic pitfalls: they were too ambitious; they failed to commit the people, software, relationships, liquidity, and capital that were needed to give the venture true autonomy; and they were burdened by equal-governance arrangements.

These shortcomings have been especially troubling given the inherent complexity of the multipartner relationships that characterize B2B deals. However, our interviews with executives at more than 25 B2B consortia uncovered techniques that managers who are setting up alliances or restructuring existing ones can use to increase the chances of success.

Companies caught up in the first wave of B2B alliances tended to chase too many deals, and those deals were too broadly based

1. Narrow the scope: Companies caught up in the first wave of B2B alliances tended to chase too many deals, and those deals were too broadly based, involving large numbers of products, business functions, and customer segments. By contrast, early successes in the second wave of B2B alliances focused more narrowly. Both companies that merged to form Citadon, for example, started with the aim of creating an all-purpose marketplace to serve the global engineering and building industry. But after negotiating several alliances, the companies decided to narrow the scope to offer on-line project collaboration software, purchasing platforms, and on-site printing.
2. Commit assets: To reach a critical mass of trading volume rapidly, most B2B consortia rely on their initial partners. Yet relatively few exchanges have been set up in such a way as to get the necessary commitments from them. For example, ChemConnect, an on-line chemicals marketplace, offered equity to more than 30 traditional chemicals companies in an attempt to attract liquidity quickly. But just three of these partners attracted more than half of ChemConnect’s 1999 transactions. In B2B alliances that provided for performance incentives rewarding specific contributions (such as actual trading volume), less than 10 percent of the partners participated in rival exchanges. More than half of the partners in other alliances did so.
3. Make the tough calls on governance: A deal stands a greater chance of success if it establishes the right governance model. Our research on consortia suggests that two options can work. One is to set up an independent entity that controls assets, people, and technology—an approach requiring the parents to commit liquidity and, in effect, to outsource to a B2B joint venture. This model is particularly appropriate when no partner is willing to relinquish control. The second option, the "hub-and-spoke" model, can work when one company—generally a larger or better-performing one—dominates the decision making while the other partners accept relatively limited roles. The more successful companies tend to have smaller, functionally diverse boards, with founders balanced by outsiders. Our research and client work show that, by contrast, consortia that attempt to cope with equal governance often end up in gridlock and failure, especially where the parents themselves must be involved in day-to-day operations.

Going global

In e-commerce as in other spheres of business, alliances are effective vehicles for global growth.³ Fully 75 percent of the e-alliances intended to promote geographic expansion created value on announcement (Exhibit 5), and though it is too early to assess the long-term outcome, many of them appear ready to succeed. Cross-border alliances permit an Internet company with an established business model, technology platform, brand, and management approach to pursue growth opportunities by quickly gaining access to local customers, marketing organizations, and brick-and-mortar assets. Trying to build these capabilities from scratch is expensive and slow, and acquisitions carry substantial premiums and added risk.

Several Internet first movers have used alliances to pursue globalization. E*trade expanded into more than half a dozen countries through joint ventures, while in Japan, Yahoo! teamed up with Softbank and quickly established a leading portal with a market reach of more than 70 percent and net profit of more than $10 million in 2000. Although a more and more unfor-giving operating environment has forced most Internet companies, particularly in the United States, to rethink their pursuit of globalization, cross-border alliances continue to provide a sensible strategic option in many fragmented markets. A lot of European and Latin American on-line players, for example, will have to pursue cross-border combinations—alliances or mergers—just to achieve scale.

Negotiating a deal

The Internet is the ultimate fast-moving business environment: products, leadership positions, and technology change, so deals must be executed quickly. This rapid pace can destabilize alliances and thus make restructuring necessary. In navigating the on-line milieu, companies must remember the need for flexibility, resist the allure of exclusivity, and strike the correct balance between the carrot and the stick in the deals they sign.

If uncertainty is rife and the bargaining power of a partner is likely to increase, its managers should consider creative structures that get the deal done quickly, flexibly, and in a way that reduces risk. A start-up electronics e-tailer we interviewed needed catalog content to build its Internet business, for example. Rather than squander the first-mover advantage by negotiating sequentially with partners that held every card, the company offered them its initial revenue streams in exchange for catalog content. Once the start-up had built up enough traffic to sustain its site, as well as a comprehensive database, it renegotiated the revenue-sharing terms with the manufacturers.

Managers should think about experimenting with a pilot deal that has a fixed scope and duration, isn’t exclusive, and involves little or no cash. Successful portal deals are often relatively short-term and narrowly based in the beginning and then escalate. SportsLine.com, for instance, entered into its exclusive three-year sponsorship deal with AOL in October 1998 after having previously negotiated a one-year arrangement that allowed it to model the economics of its partnership with AOL precisely—and to show AOL its value.

Alliance partners should be wary of exclusive deals. True, such agreements can be worthwhile: in an alliance with AOL, for instance, E*trade anted up $25 million for a two-year anchor position on the portal’s finance channel and generated substantial volume at an attractive customer acquisition cost.⁴ But companies with strong brands may not need such alliances, while they may not be economic for companies with weak brands. Where exclusivity is needed, it should be limited (in product, market, or time) and tied to clear performance milestones. In essence, if a company can negotiate exclusivity, it may be unnecessary, and if exclusivity is available, it is likely to be too expensive.

Winners structure their deals to include carrots (by offering performance incentives) and sticks (to ensure execution). SportsLine and AOL, for example, agreed on a series of creative performance-based deal terms. SportsLine undertook to pay AOL more than $23 million over the three-year life of an alliance if AOL delivered 1.2 billion impressions (or hits). AOL benefits from revenue-sharing agreements and warrants once AOL-generated traffic meets minimum revenue thresholds. Both parties accepted several sticks. AOL was to compensate SportsLine according to a formula if AOL ended the deal early; SportsLine committed itself to maintaining its relationship with the CBS television network and to remaining one of the top sports sites on the Web or it risked losing its exclusive status on AOL.⁵

Whether the focus is on B2C, on B2B, or on some hybrid market, alliances will continue to be an intricate and necessary part of e-commerce strategies. By heeding the lessons of the past and by understanding a few general principles, companies can increase the odds of success.