The Internet has become a game of musical chairs, and the "portals" seem to control the music. With companies spending as much as $100 million to gain access to the traffic that an AOL generates as a portal to the on-line world, many executives wonder whether they, too, need to pay extraordinary sums to make sure they're not left standing when the music stops.

That's an interesting question, but it obscures a more fundamental issue: The portals have changed the economics of electronic commerce. In the good old days (all of maybe 18 months ago), you could develop an on-line marketing strategy and then negotiate a revenue-sharing arrangement with a portal. Share the risk; share the return. Not a bad world. But the portals got smart. They learned they could grab the return and make you bear all the risk. They auction space on their sites for large, guaranteed payments. Then they demand a share of any upside, too.

You spend so much to lock up space that the portal captures all the savings you expected to get from doing business on-line. So, you're forced to charge customers the same price they would pay through any other channel. Meanwhile, you have to turn your optimistic projections of on-line commerce into reality just to break even.

Given the new economics, even buying access to the right portal at the right price won't be enough unless you find fundamentally new ways of doing business on-line.

Look at American Greetings, which in late 1997 agreed to pay several million dollars to AOL over three years. American Greetings didn't just try to sell its traditional greeting cards. The company created thousands of cards that can be e-mailed. Many include animation and customizable messages. American Greetings also set itself up as a broker, referring business from its Web site to ones that deliver gift baskets, chocolates, or flowers. American Greetings says the Web site isn't even cannibalizing its existing business, because buyers of physical cards tend to be women who are middle-age and older, while on-line purchasers are mainly younger males. American Greetings gets it.

Allou Health & Beauty Care doesn't. In June 1998, it agreed to pay AOL $12 million plus a share of revenue for a four-year, nonexclusive deal. But Allou didn't change a thing about how it does business. Its on-line customers have access to the same name brands at the same prices that department stores offer in the physical world, with no more expert advice than you could get from any retail clerk.

While the amount you pay a portal is hardly unimportant, the bigger issue is how to think like an American Greetings, not an Allou. If you're going to pay all that money to a portal, you might as well get something out of it. Here are two ways to think differently:

CONSIDER NEW VALUE PROPOSITIONS. This is hard, because you've spent years figuring out exactly how to meet your customers' needs. But it's the crucial first step.

Edmunds shows how you can become a broker, collecting a cut of business you direct to others. For years, Edmunds made good money by selling price guides for new and used cars. The company owned the market. But, when Edmunds went on-line, it gave away its information. Edmunds set up deals with automobile-buying services and manufacturers to receive commissions on transactions from customers it refers. On-line revenue now makes up 80% of its total. With fewer than 20 employees at its on-line business, Edmunds was involved in several billion dollars of car sales last year. Interestingly, book sales have held their own since Edmunds started giving the content away on-line.

Another approach is to create "communities of value." [See Digital Strategy column] The idea is to facilitate customers' ability to interact in a community, and then figure out ways to use the community to make money. VerticalNet facilitates transactions, provides news and product information, and enables multi-way customer/supplier interactions in 22 industries. LTV Steel, Steel Dynamics, and Weirton Steel recently launched MetalExchange, an on-line community for those who buy and sell steel. Once those communities become established, VerticalNet and the steel companies could not only make money as brokers but also could try to sell other things to community members, to sell information that they gather as the moderators, or to try a number of other ways to profit.

REVISIT ALL YOUR ACTIVITIES AND PROCESSES. Many of the things that are done in the physical world have little meaning in the on-line world. Likewise, new things need to be done on-line. Yet, because of momentum, many companies just keep doing what they've always done.

When we worked with one insurance company to reinvent the way it operates, we put executives through a day-long exercise that often proves useful. We had them look at their services through the eyes of their customers. Then, we had the executives think about how, if they left their current employer, they could use information technology to create a ferocious competitor. Spurred by the kind of out-of-the-box thinking that resulted, we found that for one major business process 24 of the 52 activities it normally engaged in with clients could be eliminated on-line. The other 28 could all be simplified. Four new capabilities were added.

A major reason for the changes was that the Internet now gives companies an easy way to exchange information with customers, making everyone more efficient. For instance, an insurer could get information directly from a corporate client's payroll records, rather than forcing the customer's benefits department to do a lot of gathering and processing of the data—which, by the way, would be slightly out-of-date by the time the insurer got it.

You can also become more efficient by "outsourcing to the customer." Customers like to be in control, so letting them do your work can both lower your costs and increase their satisfaction. Federal Express reduced the cost for package tracking inquiries from $2 each through the call center to $0.05 over the Internet. Yet customers get information faster by doing it themselves and are in control, so they love the service. Dell Computer goes a step further. It requires that its vendors provide the same sort of on-line capability.

The Internet offers businesses the rare opportunity to reinvent themselves. If merchants follow the traditional model and simply assume they are a vendor paying a distributor for shelfspace, then they are failing to capture the potential of the Internet. Maybe we'll eventually thank the portals for forcing all of us to come to grips with the new economics of the on-line world.

Messrs. Kingley and Robinson are partners with Diamond Technology Partners. They can be reached at kingley@diamtech.com and robinson@diamtech.com.