Internet Business Models

1. Internet Business Models B.P.S. Murthi

2. Industry Players

3. Content aggregators AOL Yahoo 400 m Excite 200 m CNET 200 m Lycos 100 m E-commerce Cisco systems - $ 9100 million AOL $ 5700 Intel $ 5600 Dell $ 4500 IBM $ 3500 Service providers IBM EDS Computer Sciences EMC Pitney Bowes Market makers Schwab 1100 Citigroup 800 Etrade 400 Sabre 300 Ebay 300

4. Backbone MCI 33.0% Sprint 9.7% Intermedia 7.7% Cable and Wireless 6.4% Electric Lightwave 5.3% ISP / OSP AOL 22.2 m users Netzero 3.8 m Earthlink 3.3 m Compuserve 2.7 m MSN 2.5 m Content creators Time Warner 27,000 Walt Disney 24,500 Knight Ridder 3,300 Dow Jones 2,100 Ziff-Davis 700 Last Mile AT&T 62,400 SBC 49,500 MCI 33,300 Bell Atlantic 33,200 GTE 25,300

5. Software Microsoft 19700 Oracle 8800 NCR 6200 Computer Associates 5300 SAP 5000 Hardware IBM 87,500 HP 42,400 Lucent 38,700 Compaq 38,500 Motorola 31,000

6. Changes due to Internet • Mediating technology - interconnects • Universality - enlarges markets and shrinks distance • Network externality - More users greater value • Distribution channel - digital vs non-digital • Time moderator - shrinks time of service and enlarges time of operation • Information asymmetry reducer • Infinite virtual capacity • Low common cost standard - open standards • Creative destroyer - reduces barriers to entry • Transaction cost reducer • Dis-intermediation - reduces intermediaries ??

7. DNI framework • Digital - • speed • digital versus non-digital • Networked • dialogue • alliances • Individuals • customization • flexibility of time • flexibility of programming

8. Digital products • Low marginal costs – can be copied easily • Low distribution costs • Amenable to customization • Non-destructible • High variation in valuation between customers and so should be priced based on customer value • Have positive and negative externalities

9. Digital • Moore’s law – every 18 months speed of processors will be doubled. • Metcalfe’s law – value of a network rises as the square of the number of users • Coase theorem -Why do firms exist? • Firms exist to reduce transaction costs which result in inefficiency. • Internet reduces transaction costs - firms need to downsize.

10. How do buyers behave differently online? • Attention deficit • Effect of search engines, product reviews, testimonials will increase • Need for suggestion, customization • Customers can customize the offer and context – co-production • Search is different – bots

11. Some research findings • Online customers more loyal • Less price sensitive than commonly believed – depth of information and web interactivity lower price sensitivity • Brand names are more valuable when products have few search attributes (e.g. clothing)

12. Non-digital products • Choice is separated from purchase • Customers are able to make informed decisions

13. Barriers to e-commerce • Newer technologies – customers need to change behavior • Perceived lack of • Privacy • Security • Speed • Reliability • fulfilment

14. So what can be done? • Make it easier and cheaper for customers to transact • Learn how customers buy - Develop, maintain, and use databases • Customize billing • Show them their history • Share your inventory levels • Offer easy search tools • Make them come back – create stickiness – build communities

15. 5 Cs of Internet • Commerce – • B2B - Vertical hubs (e-steel) versus functional hubs (iMark) • B2C, C2B (Priceline), C2C • Intermediary • Community • Content • Communication • Coordination – among employees, among customers, between firms and customers

16. How marketing is affected by internet?

17. Marketing defined • Marketing is a process used by sellers and buyers to initiate and complete transactions • Need • Buyers • Sellers • Each has something of value to offer • They can voluntarily complete the transaction

18. Some thoughts… • Who is in charge of the process? • What is the role of the customer? • Who is doing the “planning and executing”?

19. Exchanges • Who initiates the exchange? • Who controls the exchange? • How does information flow? • Reduction in Information Asymmetry • Move to information democracy

20. Information democracy • Customers will post messages • Customers will disagree with company’s view • Customers will expect privacy

21. The new exchange architecture Mohan Sawhney Industrial AgeInformation Age • Marketer initiatedCustomer initiated • Marketer controlled Customer controlled • MonologueConversation • One timeOngoing

22. Metaphors we market by • Market as jungle • Customers as targets • Marketers as hunters • Products as mousetraps • Salespeople as baiters- and- switchers • Promotions as campaigns • Relationships as conquests and acquisitions • Customer visits as eyeballs and traffic • The hunter has become the hunted...

23. Towards a new marketing metaphor • Marketers as gardeners • Customers as plants • Loyalty as roots • Profits as harvest • Marketing as seed, feed, greed, and weed • From hunters to settlers...

24. Towards new marketing assumptions The death of the transaction the rise of the relationship The death of the passive consumer the rise of the active co- creator The death of opaqueness the rise of transparency The death of the product the rise of the experience The death of the monologue the rise of the conversation

25. Marketing concept evolution • Production concept • Selling concept • Product / Brand management • Customer management

26. Is there pioneering advantage on internet? • Unique assets accumulate • Number of members, member content • Barriers to new allegiances get higher • Relationship and trust grows • Adapt to technology • Factor costs increase • shortage of skilled hosts of bulletin boards and chat rooms • Concentration limits opportunities • Increasing returns • Economies of scope • Acquisition becomes expensive • High stock prices and deep pockets

27. CATEGORY -- Pioneer Browser -- NCSA Mosaic Search Directory -- Yahoo Free Email -- Hotmail E-tailing -- ISN Books -- Amazon Music -- CDNow! C2C Auctions -- Ebay B2B MRO -- Ariba B2B Auctions -- FreeMarkets Current Leader Internet Explorer Yahoo Hotmail Amazon Amazon CDNow, Amazon Ebay Ariba FreeMarkets First Mover Advantage?

28. Business to Business Where the e-commerce action is…

29. History • Electronic Data Interchange (EDI) • Firm to supplier electronic connection • Firms could have such links with only a few suppliers • Limited transaction ability • Large buyers and suppliers were using EDI excluding other smaller players

30. Internet Infrastructure/access Closed/private Open/ Public Public/private E-markets Many to many (Mediated) Nature of transactions E-commerce EDI One-to one (direct)

31. Vertical hubs • Plastics • Steel • Chemicals • Paper • Energy • Cattle • Telecom • Flowers

32. Functional hubs • Logistics management • MRO procurement • Capacity management • Investment recovery • Human resource management • Project management • Media buying • Credit management

33. What went wrong with B2B companies? • Liquidity dries up • Suppliers fear erosion of margin • Many sign ups but few transactions • Fear of dis-intermediation • Bad business model • Exchange fees not much • Just machine information not enough Capital market Technology woes

34. B2B designs • Exchanges – transaction focus • Workflow markets – process focus e.g. Chingari • Marketing >> ad agency, market research • Metamediaries – solution focus e.g. Biztro • Auctions, logistics, credit, HRM, marketing, Learning + procurement + link with customers • Industry consortia – e.g. Covisint

35. Consortia • Buyer sponsored • Concentrated buyers, fragmented suppliers, multi-layered supply chain • Autos, aerospace, hotels, retailing • Supplier sponsored • Few suppliers • Paper, Meat and Poultry, metals, Airlines • Intermediary sponsored • Fragmented industry, strong few channels • Food service, packaged goods, electrical supplies • Startup firm • Fragmented industry, early mover advantage • Steel, chemicals, life sciences

36. Industry consortia • New century network – Newspapers • Integrion Financial network – banking • Kaleida, Taligent, PowerPC – computers • Spectrum – Electronic bill payment • NOISE – Netscape, Oracle, IBM, Sun

37. B2C Markets

38. Individual Choice • Unlimited choice produces information processing overload • Need for organization and suggestion to simplify task • Consumers need selection and suggestion • Selection + Suggestion = Value

39. Selection and suggestionSheth and Sisodia (1997) • Selection • Greater value consciousness • Power shift to consumers • Shopping on demand • Suggestion - increases loyalty • Greater personalization • Co-creation • Automation of consumption

40. Personalization • Collaborative filtering • Clustering and segmentation • Do it yourself options

41. Similarities • Media = real lifeReeves and Nash • People treat machines and software just like people • Politeness • Personality • Gender bias • Media quality

42. Differences • Lack of social cues • Group dynamics • Flaming - speak incessantly on relatively uninteresting subject or with a patently ridiculous attitude • Why is there more flaming in email communications ? • Lack of feedback - harder to judge disapproval and confusion • Text is not as rich as personal interaction - need to use stronger words and images • Lack of social cues and anonymity - causes people to be braver • Implication for customer service

43. Differences • Quality cues • How to communicate quality • Hanson and Putler (96) varied the number of downloads • Need for independent verification • Cognitive difficulty • Keyword search or browse or both ?

44. Value of Online CommunitiesHagel and Armstrong • Communities of transaction • buy, sell, deliver info e.g. Virtual Vineyards • Communities of Interest • Special topics, high degree of interpersonal communication, e.g. GardenWeb, Motley Fool • Communities of fantasy • Red Dragon Inn, ESPNet • Communities of relationship • life experiences, cancer forum, divorce • Try to provide all four as far as possible - travel industry - source of long term first mover advantage

45. Online Communities – Advantages • encourage communication • Message boards, chat rooms, instant messaging • focus social interaction • Members log in for hours a day vs. minutes • Businesses are active community builders • Improves organization’s communication ability • Virtual gathering places provide power to consumer • Online communities can alter the nature of marketing

46. Online Communities – Disadvantages • isolate individuals • Typing at a keyboard isn’t real socializing • lead to psychological problems • Depression, loneliness • lead to shallow relationships

47. Permission Marketing

48. 92% go to internet to see email. Advantages of email • Cost • Virtually real time distribution • Interactivity – direct links to web sites • Higher click through rates • Email is proactive and better at targeting

49. E-mail marketing strategies Acquisition • Permission marketing • Sponsored newsletter • Sponsored discussion list • Advocacy marketing (referrals) • Partner co-marketing • Retention • CRM • Corporate newsletter • Reminder service

50. Plain text/link – 10% use – 3-4% response – 2 c • Clickable text – 60% - 6-8% response – 3 c • Images and HTML – 30% - 12-15% response – 5c • Interactive and Graphics • Broad • Segmented • One-to-one • Browser sniffers – find which browser a customer uses and optimizes for the richest media