Classification of E-Commerce Firms

1. Classification of E-Commerce Firms Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY 10012 Tel. (212) 998-0022 Fax (212) 995-4230 jlivnat@stern.nyu.edu Web page: www.stern.nyu.edu/~jlivnat

2. Classifications • Classification by seller/buyer • Classification by product or activity • Classification by sources of revenues

3. Classification by seller/buyer • Business to Consumer (B to C) • Southwest Airlines generates over 15% of its revenues from its online site. http://www.southwestairlines.com/ • Business to Business (B to B) • Automobile manufacturers organizing an exchange to buy components from suppliers. http://www.generalmotors.com/cgi-bin/pr_display.pl?1202 • Consumers to Consumers (C to C) • Auctions sites like E-Bay. http://www.ebay.com/ • Consumers to Business (C to B) • Selling information to businesses like gorefer. http://www.gorefer.com/ • http://www.mercata.com/

4. Classification by product or activity

5. Classification by Revenue Sources • Revenues from selling products or services • Traditional sales http://www.amazon.com • Commissions http://www.priceline.com/ • Per-transaction fees http://www.nytimes.com/ • Advertising revenues - See Appendix A • Referral fees: See Appendix B • per referral • fixed amount • percentage of transaction • Market creation fees http://www.ebay.com/

6. Advantages of Classifications • Classifications by seller/buyer emphasize the markets in which the firm operates. • Classifications by product/activity emphasize the nature of the business. • Classifications according to revenue sources focus on the underlying business model. • An E-Commerce company is likely to be in more than one category. • The analysis of categories helps in profiling the business (segments).

7. Warning • The Following Definitions of Various Business Models are not mine. • They were developed by Professor Michael Rappa: • http://ecommerce.ncsu.edu/business_models.html

8. Brokerage • Bringing buyers and sellers together • Buy/sell fulfillment • Online stock trading • Market exchange • B2B (metals exchange) • Virtual mall • Internet fashion mall • Auction broker • E-Bay • Search agent • My Simon, Dealtime • Fee per transaction

9. Advertising • Free content or services to users. Content (service) providers get advertising revenues. • Model in existence for radio and TV. • Need very high volume or very specialized audience. • Generalized portals. • Personalized and specialized portals. • Attention/incentive marketing. • Free products or services. • Bargain discounters.

10. Infomediary • Collecting and selling data about consumers, interests and buying habits. • Sharing information among consumers • Book reviews on Amazon • Registration • Collecting information on users in exchange for access to content (newspapers, free phone services).

11. Merchants • Wholesalers and retailers on the Web. • Web-based only, with no brick and mortar operations. • Catalog services • New form of direct mail • B&M on the Web • Staples • Digital content • Music • Software

12. Manufacturer • Manufacturer bypasses the wholesaler to reach final customer. • Dell • Personalization • Flowerbud • Faster delivery • May cause distribution channel conflicts • Airlines and travel agents

13. Affiliate • Referring to other sites • Similar to Yellow Pages or referral fees for lawyers. • Hitting the customer when the purse is open. • Using information on current purchases to induce further purchases of complementary products and services.

14. Community • Creating a community of similar users. • Soliciting donations from users and foundations • Creating knowledge networks • Collection of experts who can respond to questions • Sometimes experts get paid directly per question.

15. Subscription • Pay for content • General reluctance to pay for content on the Web. • Exceptions: • Wall Street Journal • Premium content (detailed stock research reports) • Archived information

16. Utility • Pay per use or per time • Similar to Pay Per View movies • Renting software and applications • Payment per data extracted • Credit reports • Retrieving old publications

17. Mixture of Business Models • Most E-Commerce firms have a mixture of business models • Community and advertising • Merchant and affiliate • Business models change and continue to evolve • The environment is very dynamic • The need to remain flexible

18. The Business Model • Identify the value drivers: • Number of visitors • Number of members • Number of transactions • Assess the required long-term volume to make a profit • Assess the reasonableness of the required volume and costs to achieve it.

19. Sources of Information • Forms filed with the SEC (http://www.sec.gov/ ) : • Registration statement • Form 10-K • Form 10-Q • Proxy statement • Special reports Company’s own Web site http://www.aol.com/ http://www.corp.aol.com/ • Investment research • Tracking organizationshttp://www.mediametrix.com

20. Long-Term Business Models • Surviving advertising models • High volume free content services • The broadcasting model • Personalized and specialized content services • Free tourist guides • Interactive models • Surviving community models • Right demographics

21. Long-Term Business Models • Surviving brokerage models • Only if B&M do not offer their own services • Merchants • Only if reduces transaction costs or increases the “pie” • Affiliates • Will it be pay per referral? Pay per listing (like Yellow Pages)?

22. Long-Term Survival • Depends on the long-term tradeoff between revenues and costs. • Cheap initial financing masks true long-term costs. • The recent decline in prices of Internet stocks can force people to think through more carefully of the long-term viability of the business model.

23. Summary • Classifications help think about the business model. • Classifications also help in assessing the long-term viability of the business.