Online business: how to diversify your activities
The question of business diversification is a difficult one; on the one hand, history shows that diversifying one's business activities often leads to administrative inefficiencies and subsidizing effects.
Administrative inefficiencies materialize the fact that managing a number n of businesses, each coming from a different industry, is actually more costly than n times the management cost of any of them (assuming that each of them incurs the same management costs if they are run independently). Why is it so ? Because typically a management team will be specialized in a given area and won't have the skills to manage any business within any industry.
Subsidizing effects denote the propensity of a business owner to subsidize its not-so-profitable activities with the money coming from its profitable operations instead of divesting the money from the latter and reinvesting it into more profitable ventures. Why does this phenomenon exist ? Simply because humans prefer not to admit their failures and hate the idea of giving up something they have already worked so hard for ... however, in finance, such a flaw can be fatal, because an unprofitable business has no economic reason to be.
In order to illustrate the above arguments, one can mention the case of conglomerates in the 90's, which turned out to destroy value and were later subject to demergers.
The question we would like to answer here is whether online business owners should diversify and how this diversification should be implemented.
First, the Internet shares the same industries as the real-world economy, and as such the same reasoning as above may apply: while you can shield yourself from a downturn in a given industry by diversifying your operations, you also run the risk of incurring administrative inefficiencies and subsidizing effects ... not to mention the fact that, if you only have a few employees, your time constraints may be such that running too many online businesses will have a direct impact on the quality of the services they propose.
However, thinking in terms of industries might be insufficient in the backdrop of the Internet; indeed, you may also want to think in terms of business models. As a matter of fact, every business model presents its advantages and its risks. For instance, paid advertising very strongly depends upon the rates determined by the big players (Google, Yahoo, MSN). By the same token, one can safely assume that a large part of your web traffic will come from organic traffic (that is to say traffic coming to your website from search engines for free). But this presents the risk of having a high income volatility, since your earnings would decrease very quickly should your website(s) be unlisted from a major search engine for any reason (considering that Google is currently concentrating the bulk of all Internet searches in the world, your income might be totally dependent on Google's good will). This is the reason why it would be a safe option to keep in mind the traditional business models (selling products by ways of paid marketing) which can be conveniently adapted to the Internet and constitute a safeguard against search engine monopolies. How can this be achieved ? By authoring products with a high value added, which will allow you to have a decent marketing budget and thus remain largely independent of the evolution of the search engine market.
