Cherins and Juno Online show why business models must flex

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The most misbegotten, misunderstood, misused entity in the New Economy is "The Business Model."

The Business Model is a description of how an enterprise is to be organized to seek revenues and profits. It explains, ideally in a simple and succinct way, a company's intended markets, products or services, and the value it intends to add to the latter to gain lucrative custom from the former. Those who have navigated the rivers and streams of the wired world will affirm that The Business Model is (more than a newly identified unmet need, more even than proprietary technology) the sine qua non of a successful start-up. It is the magnet that attracts investors, from the venture stage onward; it is the "nut graf" in the business magazine stories that seed the mythology of success.

All this is quite ironic because in the New Economy nothing is more transient than a company's Business Model. The same financiers who demand one before anteing up their cash will look blithely on as managers shift and shimmy into a new one. America Online's evolution from proprietary service to dial-up mega-ISP to broadband content empire, or Amazon.com's shift from book retailer to superstore to mall, are only the most obvious examples of model malleability. They show that The Business Model is to the Internet Economy what a high concept is to Hollywood: the basis on which you can build a deal, even if it ultimately bears no resemblance whatsoever to the finished product.

Which brings me to Juno Online Services. Launched in late 1996, Juno, a stepchild of the same D.E. Shaw & Co. investment bank whence emerged one Jeff Bezos, began life as a firm that offered free e-mail to those willing to accept advertising in return. Like many, I was confused about its Business Model -- until I bumped into its exec VP, Bob Cherins, at a conference almost a year ago.

Bob, a deeply respected adman and direct marketing savant (he spent his early career at Columbia House, ran McCaffrey & McCall and later launched Jordan McGrath Direct, before becoming one of Mad Ave's earliest Net leapers) explained Juno's business was "capturing eyeballs and then selling goods and services to and against them." Advertising was only a part of it; these customers could also be "upsold" premium services, such as Internet access. "That's direct marketing," Bob told me, explaining his new line of work. "I understood that Business Model very well."

But a few weeks ago Juno announced it would start offering free full Internet access, thereby abandoning a key source of revenue. Although some observers reacted negatively (The New York Observer called it a shareholder "rip- off"), the market reacted as it does these days: Juno's shares quadrupled to $66 before settling back into the $24 range. I thought it was time to get Bob Cherins' take on The Business Model.

The Observer notwithstanding, his argument seemed sound: Although the model had "evolved," it remained essentially the same.

"We still maintain the ability to migrate customers from free to premium services, and to sell advertising against them," Bob told me over lunch at the Royalton. Increasing the user base was worth the revenue hit, Bob explained, because advertisers in the new medium require scale, and on the Net's fragmented shelf only a handful of actors will be able to stay big enough to garner national ads. The rating service Media Metrix says Juno has more eyeballs than all but AOL, Yahoo! and one or two others; the company was determined to keep it that way.

Meanwhile, Juno is maintaining premium services; it is already testing a new broadband service, Juno Express, for example. So the new Business Model, like the old, has its basis in the same, familiar realm: cable TV, in which operators offer a basic service, often add new, free channels as blandishments, and continually try to upsell viewers on premium packages. With the cable precedent in mind, Juno is betting "free" is a relatively risk-free Business Model (certainly against those who continue to charge for Internet access).

"If I were AOL, my reaction to the Free ISP movement wouldn't be Time Warner," Bob Cherins told me. "It would be to create a free service of my own. If you're going to lose customers, lose them to yourself."

Mr. Rothenberg can be reached at randallf@echonyc.com.

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