Who will win the coming online battle? Will it be the Internet, or the large commercial gateways—Prodigy, America Online, CompuServe, and now Microsoft? It’s a question that many industry participants have been asking. In most respects, however, it is the wrong question because electronic communities will emerge in the next 12 to 18 months to revolutionize online services. The real questions are: What will these communities look like? How will they create value? Who will organize and own them?

All companies marketing goods and services to consumers or businesses, and particularly those involved in direct marketing, should be concerned about these issues. (This article focuses on the consumer arena, but the principles apply equally to business.) Electronic communities are set to transform the structure of many industries, and the role and scope of the marketing function within them.

Emergence

Millions of individuals have begun to participate in the online arena in the past three years. Conservative estimates cite 7 million users of proprietary services such as America Online, Prodigy, and CompuServe, and 5 million private users of the Internet, in the US. These users have reached the critical mass and balanced demographics that will allow electronic communities to form. The necessary technology is widely available and now affordable to a mass market.

Over the past decade, the personal computer has become a fixture in many homes: over 30 percent of US households are now equipped with PCs, and 45 percent of these have modems. Technological advances have given PCs a capacity and power unimaginable ten years ago. Software development has kept pace with hardware, making it possible to combine many previously separate activities—voice communications, entertainment, information, and transactions—in a single package. Developers are becoming skilled in making online facilities attractive and easy to use.

This gathering momentum will accelerate technological progress. Cable companies are currently exploring plans to equip homes with cable modems, which would eliminate at a stroke perhaps the single greatest drawback of online services—the frustration of waiting for graphics to unscroll on the screen.

Communication and community

Communication is at the heart of today’s online services. The ARPANET, from which the Internet later sprang, was funded by the US Department of Defense, but driven by a group of scientists who had a vision of communicating with one another electronically. The expansion of the Internet, funded by the National Science Foundation, was also fueled by academic communities.

Today, bulletin boards and chat lines are popular and growing: there are about 8,000 topic areas in Internet Relay Chat (IRC), for example. Such facilities also seem to play a vital role in encouraging users of commercial services to spend time online. Since the large gateways count marketing as a major expense and suffer from high churn rates, the development of loyal communities is in their strategic interest.

Countless mini-communities are forming on and off the Internet, although most remain small and noncommercial

Electronic communities have actually existed for many years. Groups like The Well have spawned strong relationships and developed their own norms and sense of history. Countless mini-communities are forming on and off the Internet, although most remain small.

Contracts tend to be in barter form—financial transactions are rare, and often resisted

In general, however, these communities are noncommercial. Communication, entertainment, and information are their reasons for being, and contracts tend to be in barter form. Financial transactions are rare, and often resisted. We believe, though, that new kinds of community that are more commercially focused will emerge soon.

Consumers will demand such a shift. They can already buy wine online in one place and talk to other oenophiles in another. They can order a bouquet of flowers by going online as easily as by picking up the phone. Financial transactions are already a feature of life online. So what will change?

First, communities will more effectively integrate communication (chat, bulletin boards, e-mail), information (directories, advertising), entertainment (books, magazines, games) and transactions. Parents could then not only read the latest edition of Parenting, but also talk to other parents with a baby who will not sleep, be recommended a book on the subject and order it there and then, browse for toys for their three-year-old, and post a bulletin board inquiry about asthma in young children. The range of options that might be available to users in another topic area, travel, is illustrated in Exhibit 1.

Second, dominant communities are likely to emerge in each topic area. Companies that learn how to merge communications with other content in a commercial environment will be well positioned to become the early organizers of strong communities. These first movers will also enjoy a more enduring competitive advantage, since they will have a head start in building a critical mass of community members (Exhibit 2). Transaction and advertising reve-

nues will help them improve content and reduce user fees, and they will capture data on users’ behavior which will give them a stronger understanding of consumers’ needs.

Consumer needs

We have identified four basic types of social need among online users. These relate to the amount of interaction users want to have with others, the breadth of subjects on which they wish to interact, and the extent to which they desire to escape reality in cyberspace.

Groups of people who interact regularly, cover many different topics, and are aware of one another’s electronic identities will build up a history together and form communities of relationship. Examples include The Well and, on a smaller scale, NYCbar on the Internet. Groups are also beginning to form among people with diseases such as cancer and AIDS, and among those recovering from various forms of addiction.

You can now play a medieval baron at the Red Dragon Inn on America Online

Other groups will also interact regularly, perhaps on many topics, but they will not be aware of others’ identities; relating in a purely fictional setting, they will create new environments, personalities, and storylines, and form communities of fantasy. Such communities already exist in the shape of MUDs (multi-user dungeons), and are beginning to appear in less intense and more entertainment-driven formats. For instance, you can now play a medieval baron at the Red Dragon Inn on America Online, or take on an avatar in Worlds Inc’s 3-D chat area.

At the other end of the scale, users whose interaction with others is focused purely on content—buying and selling, say—are not forming communities in the traditional social sense, but creating electronic communities of transaction. Users in this group might want to buy a used car, or flowers for Valentine’s Day—or find themselves a Valentine by using an online dating service.

Finally, users who interact intensively with one another, but only on limited topics, will form communities of interest. These are defined by subject matter, but involve a higher degree of interpersonal communication than do communities of transaction. Communities of interest might be based on geography (say, restaurants in a certain city), subject knowledge (new parents, bicycling clubs, stock exchanges), social or experiential interests (families, school alumni), or transactional interests (cars, antiques, orchids).

Few topic areas will meet only one kind of need. With goods and services, for instance, many consumers like to seek advice from others before they buy, blending community of transaction with community of interest. Those areas that allow a user only to enter, make a transaction (buy a toy, say), and then exit are missing an opportunity to draw this user into a relationship with others (for instance, other parents) that might encourage him or her to return and spend more time online.

Different topics will lend themselves to meeting different needs in different ways. For goods like consumer electronics, transaction may be the dominant need, with only a small element of associated chat, such as asking other users for recommendations. Topics like personal investment may well create transactional needs, but they also lend themselves to communities of interest, with chat areas for followers of technical trends and those who believe in value investing, for instance. There might even be an element of fantasy—perhaps an investment contest with "virtual" portfolios.

A given topic area might have several users with different needs participating in it simultaneously

Community organizers should try to meet all four needs wherever possible. They are clearly not mutually exclusive; indeed, a given topic area might have several users with different needs participating in it simultaneously. One might buy a case of wine and exit, another might stay around and talk to other users about a particular vintage.

Communities of interest may evolve into communities of relationship over time as users get to know each other

Moreover, communities may well evolve from one form to another. Communities of interest, in particular, may evolve into communities of relationship over time as users get to know each other or "bump into" each other in other topic areas. Community organizers must be sensitive to such shifts.

There is also an economic reason for trying to satisfy as many needs as possible. Meeting transaction needs may help to generate trial: a parenting area providing the facility to buy infants’ clothing, toys, and books online might be a valuable proposition for a working mother, for instance. Meeting community of interest and community of relationship needs will build ties between users and keep them loyal to the community, reducing churn: the working mother might be drawn to a community of other executive mothers. Communities of fantasy, meanwhile, should increase usage. Serving all of these needs simultaneously will therefore help communities create economic value.

Value creation

Just as there are four models of the needs that electronic communities satisfy, so there are four models of how these communities create value. As with consumer needs, these models are not mutually exclusive, and any community may adjust the balance between them over time.

• An access-based model creates value via time-based usage fees, including Internet access fees. This is basically how America Online and Prodigy currently operate. The access model relies on stimulating interaction between users but results in high fees for frequent users, a problem that gateway services are trying to resolve by offering new price structures.
• A content-based model depends on fees for accessing specific content. Companies providing content on the Internet are increasingly opting for this model. It also plays a part in AT&T’s Interchange, in which users pay additional fees for access to specific content, such as back-issues of the Washington Post.
• A commerce-based model draws primarily on transactions and advertising for revenues. Some of the announcements about the recently-launched Microsoft Network suggest that it is leaning more toward this model than an access-based one.
• Finally, a synergistic model takes advantage of synergies with other businesses. For a software distributor like Microsoft, this might mean saving the cost of physically distributing software; for a service provider such as Federal Express, it might involve reducing customer service costs by replacing service reps with an online package tracking service. Most gateway services, with the possible exception of Microsoft Network, currently appear to be focusing on an access-based strategy. However, we believe that this approach will ultimately give way to a commerce-based model, for two reasons.

First, though the access model is time based, the underlying economics of online services are not primarily time-sensitive. The creation of software involves high fixed costs, while the number of subscribers is a far greater influence on community variable costs (including community management overhead, customer service, and server/network capacity) than the time spent by subscribers online. Although time-based fees may make economic sense in the short term, the need to maximize user numbers and usage frequency will eventually lead communities away from this strategy.

Second, the potential revenues from transactions and advertising in a commercial model are huge. The main obstacle lies in the "chicken and egg" syndrome long familiar to cable TV networks: insufficient users make for wary advertisers, which means less to invest in content. Merchants of goods and services may be reluctant to invest in developing the necessary programming content if consumers are in short supply. But this problem will fade as user numbers grow.

Communities meeting a specific consumer need are likely to pursue a corresponding economic model. While those that satisfy relationship needs will probably continue to focus on access fees, communities of transaction and interest will be well placed to capture commerce-based value. The information they generate on users’ online behavior will probably be more useful to advertisers than data from the relationship communities would be.

Strategies

Industry players seeking to position themselves to capture value will need to think about controlling hard-to-replicate content, proprietary distribution channels, or defensible sets of customers.

Owners of unique content are likely to be in a strong position to command a significant share of the value created

Owners of unique content are likely to be in a strong position to command a significant share of the value created by communities, especially if their content is effective at attracting new users or stimulating usage. However, this should not be confused with their ability to take on the community organizer role—which few content providers have yet had much success with. This may be partly due to the type of content on which they have focused; it is easier to envisage a strong community developing around a topical magazine like Parenting or Sports Illustrated than around Time, for example.

For the moment, there is likely to be sufficient competition in phone-based channels for distribution not to be a source of major economic advantage. However, if online services move to a coaxial cable delivery system, with its high speeds and superior graphics, and if no competing distribution mechanism emerges, cable operators with local monopolies will be well positioned to reap a large share of the value of electronic communities.

But regardless of the power of content and distribution owners, whoever learns to develop attractive communities will draw users to their services and end up controlling a disproportionate share of the value created. Whether these winners will be gateway providers, content owners, or third-party community organizers remains to be seen: it will depend on who is best able to acquire the skills necessary to manage communities.

The challenge of managing communities

Organizing electronic communities will involve a number of new roles. Indeed, an organization chart for an electronic community will not look like that of any existing media business (Exhibit 3). Within a given topic area, there will probably need to be a single executive producer who is served by a set of producers for individual subcommunities and by a set of functions that are shared across the community.

Services shared across subcommunities are likely to include marketing, customer service, community design (the role of community architect), and information systems. Marketing will require a clear understanding of the value proposition for users, content providers, advertisers and merchants, and distributors (electronic gateways, telephone companies, cable operators, and so on). Customer service will include billing.

Community design will embrace the important function of learning from the usage information collected on the community’s servers and tailoring its design accordingly. This might mean creating a new electronic area, sending feedback about content to the respective content providers, or passing pricing analyses to marketing. Information systems management will involve managing servers and networks, keeping up with technological innovation, and using this knowledge to recommend distribution and content strategies.

Key roles

Within the subcommunities, each producer is likely to play at least six different roles, of which the first three are the most important. First comes the executive moderator role of overseeing what may be a large number of system operators (sysops), who moderate the discussion on bulletin boards and chat lines. These sysops will probably continue to be amateurs who serve the community in return for free services, although there may be a small number of full-time moderators in key community areas.

We believe that future communities will require the editorial "conversation management" skills exercised by sysops to be coupled with new merchandising skills exercised by community merchandisers. This role will include identifying goods and services that are likely to be attractive to community members, negotiating with the providers of those goods and services, and then marketing them creatively to community members.

The third key role is that of executive editor, responsible for developing a programming strategy and managing the external providers of content, information, and services. The remaining roles in a subcommunity are an archivist to maintain and organize the content generated by users over time; a usage analyst to study the usage data collected and develop programming recommendations for the producer; and, finally, a new product development role to keep the community fresh and distinct from its rivals.

Some of these roles—executive moderator, community merchandiser, and archivist—will be unique to electronic communities. They will probably evolve over time as they are defined by the people filling them.

A marketer must be sensitive to the "give and take" social contracts of the online world, and ignore them at his peril

Several other roles are similar on the surface to existing media or communications functions, such as marketing, customer service, production, and information systems. However, each role will have to be reinvented within the community environment, and skills are unlikely to be directly transferable. A marketer, for example, must be sensitive to the "give and take" social contracts of the online world. Community organizers ignore such ethics at their peril.

Customer service will have to satisfy needs seldom encountered in communications or software companies. Some of the necessary skills are more like those of greeters at department stores. Producers will be steering not a one-off product like a movie, but a living community. They will have to be highly attuned to the needs of their users, as the hostess of a French salon understood the intellectual and cultural tastes of her guests. Editors will not live within the clear boundaries between editorial and advertising familiar in magazines and newspapers; commercial services will be part of the external content that they must manage.

New challenges

Established industry players must change their ideas about what it will take to succeed in online territory

Established industry players face several challenges. First, they must change their ideas about what it will take to succeed in online territory. Simply digitizing content and putting it behind a home page (the entry point to an electronic community) will not be enough. Converting it into an appropriate format and adding user communications will be difficult and costly.

Companies will also have to train individuals to leave their old mindsets behind as they take on new roles. Some of these roles will be performed not by employees, but by users. Such an arrangement presents its own problems for companies seeking to exert control over product consistency and ethical standards.

The ability to manage the economics of communities will be important. Allocating costs and assigning revenues to specific subcommunities is going to be difficult, which is no help to producers trying to decide when communities should be expanded, split, folded into other communities, or discontinued. Indeed, the management of community size will probably be surrounded by constant tension. As communities grow, small segments will push to split off and form new communities of their own. A travel community, for example, might split first into domestic and international travel, and then into continental zones; the European area might eventually spawn an area for admirers of Italy; and this area, in turn, might beget a new one devoted to Venice.

The infrastructure that is needed to manage a new community—the cost of a sysop, software development, and a producer’s time—means that a balance will have to be struck between keeping communities small enough to foster a sense of belonging on the one hand, and letting them grow large enough to be economically viable on the other. Areas focusing on transactions and fantasy may be exceptions; they may do better the larger they grow, since the availability of people with whom to interact is central to their appeal. (Too many IRC areas, for example, still have only one or two users at any given time.)

Finally, aspiring community organizers will have to decide which communities they will try to own. Their decision will be based partly on the assets that they already possess, such as brands, content, special skills, and relationships with other communities (Exhibit 4). It will also depend on the inherent economic attractiveness of a community, the value that online functionality might add for that group, and the ability of the community organizer to build an offering that is defensible against such competitors as gateways and other community organizers.

The impact of communities

The emergence of electronic communities will have implications for many businesses, and in particular for those aspiring to become community organizers, content and service providers, or marketers of goods and services.

Community organizers

Would-be organizers face a daunting array of issues, which fall into five main groups:

1. Identifying target communities. Organizers must analyze which communities are likely to be economically attractive, and how value will be generated in them. They must also assess whether there are other "natural owners" of targeted communities.

2. Designing the community. Organizers face several design issues. How finely should the community be segmented at the outset, and how will its segmentation evolve over time? Which services and products will community members value most? Should the community be built in a proprietary online service, on the Internet, or as a standalone bulletin board service?

   What will be the balance between "published" content from third parties (such as magazines and newspapers) and user-generated content? How should user content be captured, organized, indexed, and retrieved?

   Should a community welcome any surfer on the Web, or impose membership conditions and limit access?

   Should a community welcome any surfer on the Web, or impose membership conditions and limit access? What kinds of information should be captured about users and usage?

3. Managing the community. Aspiring organizers must assess what skills they lack, in particular which ones will be crucial in establishing competitive advantage. They must also decide how to develop these skills, whether to outsource certain functions (such as technical or editorial services), and how to evaluate both the performance of the individuals managing the community and the health of the community itself.
4. Planning a competitive strategy. Organizers face many strategic issues. What approaches should be employed to capture first-mover advantages and preempt competition? Are certain kinds of members valuable in the early stages to attract and lock in the next wave of members? What kinds of marketing program are likely to be most useful in generating trial, boosting usage, and reducing churn? Is there a business model that will accelerate community formation and maximize value creation over time?
5. Devising ownership and participation structures. Some of the thorniest questions for potential community organizers involve ownership structure: should organizers try to build communities on their own, or form alliances? Given the skill requirements, partnerships may often make sense, but attractive partners must be identified, and financial structures developed to attract and retain the best ones. In addition, organizers must decide how to share usage, advertising, and transaction revenue streams with partners and content providers, and how to structure ownership of user-generated content, and information on consumers’ usage patterns.

Content and service providers

Many existing owners of content and services are grappling with how they can extract maximum economic value from their assets. Which communities would their properties best fit into, or should they ever be offered exclusively to one community? How should their properties be formatted and presented online? They must also decide whether to organize their own communities, in which case they face all the issues described above.

Providers must also look out for threats to the value of their properties. Many risk disintermediation. Content providers’ advertising revenues, for instance, may ultimately be jeopardized by community owners that can collect, package, and offer to advertisers a rich set of information about users that no magazine publisher can match. Service providers also face threats, particularly those whose service can be delivered to consumers electronically, as with banking, investment management, tax and legal advice, and travel booking. These threats beg the organizational question of whether to link online community initiatives tightly with management of traditional businesses, or to keep them separate.

Marketers

Electronic communities will have a profound effect on marketing in general. Practitioners currently tend to have a narrow view of their markets. Most focus on consumer needs within the product categories they already serve; at best, they might analyze a few related categories. Their response to unmet needs is usually to consider developing a new product. It is rare for them to consider allying with another company able to provide the product, then taking a commission.

Demographic and usage data about consumers is chiefly employed to improve channel management, to develop advertising strategies, and, in the case of media companies, to create an attractive proposition for advertisers. Seldom is it used to cross-sell products that are related in terms of user needs, but outside a manufacturer’s product line. In future, a toy manufacturer, say, may need to think about forming partnerships with parenting magazines, other toy manufacturers, book publishers, healthcare providers, life insurance companies, and brokers offering savings plans for college, because all will be using the same channel. Marketers’ horizons must expand.

For the first time, knowing a customer in such detail that you can anticipate his or her needs and respond instantaneously to them is within reach

The emergence of electronic communities will lead to even finer market segmentation. The quantity of information that can be captured about customers in communities far exceeds anything currently available. For the first time, the vision of continuous relationship marketing—knowing an individual customer in such detail that you can anticipate his or her needs and respond instantaneously to them—is within reach.¹ Marketers will then need to wrestle with micro-segmentation not just at the level of the individual customer, but at the level of the individual customer at specific points in time. Those who rise to this challenge will gain an advantage over those who are trapped in legacy systems and mindsets.

Direct marketers have long been hindered by their inability to convert interest in a product into a real-time sale. Online services will overcome this obstacle by allowing a user to move seamlessly from finding out about a product to making a transaction. In fact, they will transform today’s marketing into tomorrow’s direct selling, and will shift the burden of performance proof for advertising agencies from "reach and frequency" to "volume of response and transactions."

Electronic communities, and particularly communities of interest, will represent a highly attractive and efficient way to reach customers. Marketers who are able quickly to learn how to target and develop attractive communities will be best placed to become the organizers of those communities, opening up sources of value that will extend well beyond their existing product lines. Those who are unwilling to extend themselves may find that this reluctance affects their market position for years to come.

Marketers concerned about channel strategies two years from now should be asking themselves a few questions. What electronic communities might our target consumers belong to, now or soon? Who will be organizing these communities? How can we use them to strengthen our relationships with target consumers—not just through advertising, but in terms of stimulating greater trial and usage, or even by directly selling to the consumer? Indeed, many electronic communities may disintermediate (at least partially) existing distribution channels, so marketers should assess their competitors’ strategies as well as developing their own for participating in, or organizing, communities.

Operational issues also arise. What kind of information is likely to be captured in communities, and how well equipped are our information systems to access and analyze this information? Are we organized to market both more broadly to specific customers and more narrowly to individual customers at particular points in time? If we organize communities ourselves, how do we manage channel conflict?

Grasping the promise of electronic communities will take courage. As King Arthur might say in Virtual Camelot, "May fortune favor the brave!"