Establishing the Internet channel: Short-term pain but long-term gain?

The emergence of the Internet has pushed many established companies to explore this radically new distribution channel. Like all market discontinuities, the Internet creates opportunities as well as threats – it can be performance-enhancing as readily as it can be performance-destroying. One industry where this certainly holds is the newspaper industry, where several players have rushed to supplement their traditional channels with an Internet channel, in spite of a lingering fear of cannibalizing their existing business. Making use of event-study methodology, we assess the net impact of setting up an additional Internet channel on a firm’s stock market return, a measure of the change in expected future cash flows. We find that, on average, Internet channel investments are positive net-present-value investments: the present value of the expected cash inflows is greater than the present value of the anticipated cash outflows. We then identify firm, introduction-strategy, and marketplace characteristics that influence the direction and magnitude of the stock-market reaction. More specifically, our results indicate that powerful firms with fewer direct channels achieve greater gains in financial performance than less powerful firms with a broader direct channel offering. In terms of introduction timing, early followers have a competitive advantage vis-à-vis both innovators and later followers. We also find that firms which provide additional advertising support to their Internet channel introduction achieve greater financial gains. Finally, in terms of marketplace characteristics, firms operating in fast-growing Internet environments benefit more than players operating in less munificent markets.